Gold bonds scheme makes a less than glittering start

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New Delhi | Updated: Nov 28, 2015 1:24 AM

The Centre's much-touted Sovereign Gold Bonds (SGB) Scheme has made a lacklustre debut with just RS 246 crore worth of bonds being bought so far.

gold bond schemeThe Centre’s much-touted Sovereign Gold Bonds (SGB) Scheme has made a lacklustre debut with just RS 246 crore worth of bonds being bought so far. (Reuters)

The Centre’s much-touted Sovereign Gold Bonds (SGB) Scheme has made a lacklustre debut with just RS 246 crore worth of bonds being bought so far. That’s equivalent to 917 kg or about 0.1% of the country’s annual consumption of gold of 820 tonnes.

If the government is to mop up the targeted R15,000 crore by March 31, investors must buy SGBs worth 56 tonnes at the current price fixed by the Reserve Bank of India.

Despite the dull demand for the scheme, the government termed the response excellent. “Gold Bond Scheme: 63,000 applications for 917 kgs gold amounting to R246 crore in first tranche. Excellent response for an innovative product,” economic affairs secretary Shaktikanta Das said in a tweet.

The statement from the ministry, however, appeared to acknowledge the scheme might be flawed. “Based on the feedback received from the stakeholders of the schemes, the government will continuously monitor and review the progress of the schemes at the regular intervals and make necessary improvements, in order to increase the reach of the schemes,” it read.

The first tranche of SGBs was on offer between November 5 and 20 and sold through banks and designated post offices. The average quantity per application works out to 15 grams.

Aimed at providing an alternative to buying physical gold, the bonds scheme was launched by Prime Minister Narendra Modi on November 5 together with another product, the Gold Monetisation Scheme (GMS). Investors can buy anywhere between a minimum 2 grams to a maximum of 500 grams worth of bonds.

While it may be early to judge the scheme, the government may need to do a lot of hard-selling if it is to succeed in garnering R15,000 crore from the sale of such bonds. The scheme is part of the government’s market borrowing programme for FY16.

Experts point out the fact that the price of gold, fixed for the first auction at R2,684 per gram, was 2% higher than

the market price is enough to wipe out the benefit of the interest rate of 2.75%. They say the pricing should be dynamic with investors getting the ruling price on the day of allotment.

The GMS, which allows resident Indians to deposit the precious metal and earn an interest of up to 2.5%, has also received a lukewarm response. As on November 20, only 400 grams of gold were deposited under the scheme, Gem and Jewellery Export Promotion Council’s northern region chairman Anil Sankhwal said.

While the GMS aims to tap household gold stocks of an estimated 22,000 tonnes, the sovereign bond scheme would help shift part of the estimated 300 tonnes of physical gold bars and coins purchased every year for investment into the demat gold bonds. While the interest on the bonds is taxable, the capital gains are not.

India meets most of its domestic demand for gold through imports which pressures the country’s current account deficit.

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