The sovereign gold bonds promised by finance minister Arun Jaitley in the recent Budget speech will be made attractive to savers with the twin benefits of a likely price appreciation of the metal and a nominal interest rate of 1-2%. As per an internal estimate of the finance ministry, anything between R20,000crore and R40,000 crore could be mobilised annually as financial savings through this new instrument.

The mobilisation will correspondingly reduce the purchase of physical gold and, hence, imports of the yellow metal that almost singularly pushed up the country’s current account deficit to an uncomfortable 4.7% of GDP in FY13.

Giving a peep into the likely structure of the sovereign gold bonds, a finance ministry source said these instruments, carrying a fixed rate of interest, would be redeemable in cash at the price of gold at the time of redemption. Given that the face value of the bond would change depending on the gold price and there could be in all probability an upside to the investments made, the interest rate on it would be lower than in the case of, say, government securities, the source said. The gold price will be denominated in grams of the metal.

The government, according to sources, is likely to issue these bonds with a shorter tenure of three, five and seven years to mitigate the price risks to either side and attract household financial savings, which as a percentage of GDP has declined in recent years. A cap is likely to be fixed on investments in these bonds to discourage institutional investors from participating in it, sources said. The exact contours of the scheme will be ready by May.

The sovereign gold bonds will be sold through post offices and banks to reach out to the maximum number of retail investors.

Household financial savings declined from 13% in FY08 to 7.1% in FY14 as the overall savings declined from 36.8% to 30% during the period, with a commensurate negative impact on the investment rate.

While the government is set to experiment with sovereign gold bonds, it may be noted that another new product, (retail) inflation-indexed bonds, which it launched last year as an alternative to investments in gold, bombed. The retail inflation rate has dropped from 11.2% in November 2013 to 4.28% in December 2014 and inched up to 5.37% in February 2015.

India, one of the largest consumers of gold, imports most of the yellow metal it consumes. A surge in gold imports and crude prices resulted in a record current account deficit of 4.7% in FY13 and dragged the rupee to its lowest point of 68.85 to the dollar in August 2013.

In his Budget speech, Jaitley outlined a slew of measures to curb gold imports and monetise the metal, the domestic stock of which is a huge 20,000 tonnes. He sought to introduce a gold monetisation scheme that will replace both the present gold deposit and gold metal loan schemes and launch an India-specific gold coin with the Ashoks Chakra on its face.

Bullish on bullion

* Domestic gold prices rose 30% in five years to 2014-end, despite the declines in the last couple of years
* Prices rose sharply — annual average of 22.5% — in the three years to 2012-end as did imports
* Twin benefits of price appreciation and interest (1-2%) on gold bonds could lure retail investors and help boost household financial savings
* Finmin reckons that R20,000-40,000 crore could be mobilised annual from sovereign gold bonds
* Bonds will be of shorter maturity periods to mitigate prices risks on either side
* Investments in these bonds, meant for retail investors, will be subject to a ceiling so that institutional investors refrain from subscribing to these instruments