Gold schemes: Bonds beat mop-up through monetisation

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Published: February 17, 2020 5:45:09 AM

India’s gold demand stood at 3,746 tonnes in the past five years (2015-2019), according to the World Gold Council (WGC).

Since gold already attracts a 12.5% basic customs duty, any move to raise it further to discourage imports is fraught with risks of higher smuggling.Since gold already attracts a 12.5% basic customs duty, any move to raise it further to discourage imports is fraught with risks of higher smuggling.

The government’s gold bond scheme has elicited greater response than its bid to draw idle household stocks under a monetisation programme, forcing it to rework its strategy to induce people to park their holdings with banks.

While the government has so far sold bonds equivalent of about 30 tonnes of gold, mop-up under its monetisation scheme has been 20.7 tonne since both the schemes were launched in November 2015, K Rajaraman, additional secretary at the finance ministry, told FE.

However, data show both the schemes are still a far cry from success and represent only less than 2% of the country’s annual gold consumption. India’s gold demand stood at 3,746 tonnes in the past five years (2015-2019), according to the World Gold Council (WGC).

Nevertheless, the current monetisation scheme has witnessed a marked improvement upon an earlier one under which the government had garnered only two tonnes of gold between 1999 and 2015, Rajaraman stressed. A new, revised gold policy will be firmed up in the coming months, he added.

The gold schemes (monetisation, bonds and sovereign coins) were unveiled to reduce the country’s reliance on the import of the precious metal and curb its debilitating impact on current account deficit. While the gold monetisation scheme is aimed at tapping household stocks, through gold bonds, the government wants to wean away investors from the purchases of the physical metal to “paper gold”.

Since gold already attracts a 12.5% basic customs duty, any move to raise it further to discourage imports is fraught with risks of higher smuggling.

So, the government wants to further enhance the appeal of its monetisation scheme by revising some of its current features.

Analysts say the interest rate on gold parked with banks under scheme could now be raised from up to 2.5% (which varies depending on the tenure of deposits).

Indian households, together the world’s largest hoarders of gold, are estimated to have piled up a record 24,000-25,000 tonnes of the precious metal, worth over $1.2 trillion.

However, a limited number of collection and purity testing centres (and their lack of desired efficiency), more so in rural areas, and the unwillingness of housewives to get jewellery having emotional appeal melted so that these can be deposited have dented the appeal of the gold monetisation scheme. With renewed push, though, the mop-up under the monetisation scheme can go up, said the analysts.

While gold imports were down by 15% up to July this fiscal, a sharp 93% spike in purchases from overseas in August 2019 had drawn policymakers’ attention. However, such imports have since dropped.

Gold imports have been targeted in the past as well, as some analysts view it as an idle asset that doesn’t contribute much to economic growth, unlike other products.

However, WGC (India) managing director Somasundaram PR had earlier told FE that any further curb on gold could jeopardise attempts to make gold a true asset class so that its benefits to the economy can be harnessed just like any other asset. Initiatives like monetisation and bullion banks would deliver results in the long run, he had said.

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