India: How and Why can the Government’s Gold Policies be Beneficial?
Mumbai-India (Nov 1) With the government’s THREE ‘gold’ products all set to hit the market, we give you a run down on what they are and how and why they can be beneficial. Indians’ penchant for gold is putting stress on government coffers and these products are expected to do multiple things. A look.
Gold Monetization Scheme
First introduced in 1993, it wasn’t a runway success having mobilized just 40 tonnes of gold. Now, the revised scheme is operationally far more simplistic. While the emotional and psychological attachment to gold persists, analysts say, the fact that banks are better equipped to handle gold that could make customers explore the opportunity. “Earlier it took 90 days for banks to send gold to the mint for melting, checking purity, and back. Consumers were skeptical if the gold was indeed their own or got mixed up in transit. Now, this whole exercise is transparent and quick,” said Prof Jayanth Varma, Head, India Gold Policy Centre, a joint effort by the World Gold Council and IIM-Ahmedabad.
And unlike in the past, banks are free to determine their own interest rates to attract customers. But Varma cautions to be realistic as rates on gold and money deposits cannot be compared.
“Rates on money deposits compensate for inflation, while for gold, inflation is out of the picture,” he said hinting that rates may not exceed the global benchmark of 2-3 per cent. According to him, the right way to compare is not with cash deposits but with bank lockers. “One has to pay rent for lockers, while with gold deposits, you get paid,” he said.
Where to buy: All Scheduled Commercial Banks (excluding RRBs)
Govt will notify collection and assaying centres certified by the Bureau of Indian Standards to handle gold deposits
Tenure: Short term 1-3 years, medium-term 5-7 years or long-term 12-15 years
Govt will notify refineries accredited by the National Accreditation Board to handle gold deposits
Principal and interest denominated in gold
Who can buy: Resident Indians (Individuals, HUFs, Trusts including Mutual Funds/Exchange Traded Funds
Interest rate: Banks free to fix rates
■ Minimum deposit of 30 gms of 995 fineness. There is no maximum limit
■ Designated banks may, at their discretion, allow whole or part premature withdrawal subject to minimum lock-in period and penalties
■ Premature redemption shall be in Rupee equivalent or gold at banks’ discretion
■ Gold received under the scheme will be auctioned by agencies notified by Government and the sale proceeds
will be credited to Government’s account held with RBI.
■ RBI will maintain the Gold Deposit Accounts denominated in gold in the name of the designated banks that will in turn hold sub-accounts of individual depositors
■ Banks shall enter into a legally binding tripartite agreement with refiners and collection and purity testing centres
Gold Sovereign Bonds
Globally, gold is seen as a broader financial savings strategy both for individuals and governments. It is used as an asset during economic slowdown and financial crisis, against the risks of bank defaults and loss of purchasing power. “But in India, less than 10 per cent of gold demand is in bars and coins (usually perceived as investment),” said Somasundaram P R, Managing Director, India, World Gold Council, adding that the country’s first gold bonds will help it evolve as a fungible asset.
To attract customers, the government has fixed 2.75 per cent as interest rate. Like any other banking product, purchasing a gold bond is simpler and requires little paper work. “The timing is right as overall household savings are slowing down. Gold as a saving will encourage individuals to save more,” said S K Kalra, MD & Chief Executive Officer, Andhra Bank.
Low savings could be attributed to multiple reasons, including inflation, low savings rate, lack of insufficient financial inclusion etc. Turkey, to overcome insufficient domestic savings and dependence on foreign funds, introduced the Reserve option mechanism in 2011, following which, gold deposits rose substantially.
“If you have invested in gold rather than in dollars, you would have 16 times return on investment in last 10 years,” said Erkan Kilimci, Executive Director, Markets Department, Central Bank of the Republic of Turkey last week at an event in Mumbai.
Interest rate: Fixed rate of 2.75 per cent per annum payable every six months
Who will issue: Reserve Bank on behalf of the Union government
Who can buy: Resident Indian entities including individuals, Hindu Undivided Families, trusts, Universities, charitable institutions
Denomination: In grams
Tenor: 8 years with exit option from 5th year to be exercised on the interest payment dates
How much one can buy: 2 grams - 500 grams in one fiscal year
Frequency: Bonds will be issued in tranches and each tranche will open for a notified period
Issue price: In Rs based based on the previous week’s (Monday-Friday) simple average of closing price of gold
Payment option: Through electronic funds transfer/ cash payment/ cheque/ demand draft
Where can you buy: Banks and designated Post Offices, either directly or through agents
Collateral: Bonds, like physical gold, can be used as collateral for loans
Tax benefits: Interest on Gold Bonds is taxable much like physical gold
Sovereign Gold Coin
The government’s first-ever Sovereign Gold Coin will sport — Ashoka Chakra — the traditional
24-spoked symbol appearing on the national flag and will be available in as low as 5 grams. “The idea is to encourage two sets of customers — those who buy gold purely as an investment and the fashion-conscious who makes the purchase at low price for later usage,” said Jayanth Varma, Head, India Gold Policy Centre.