While India needs to reduce imports of gold — $33 billion even now, and $57 billion in FY12 — its attempts to do so via a gold bond continue to fail as the scheme is badly designed. The bonds are not available on tap, while gold is, so that’s a big negative.
Gold prices for each tranche are fixed at the average of the last three days — this means buyers lose out while selling if gold prices are rising. While gold is fully liquid, buyers can redeem the bond with the government only after five years; they can sell the bond in the secondary market, but that hardly exists.