New gold schemes may perform better than previous plans:UBS

Mumbai-India (Nov 6)  Gold Monetisation Scheme has the potential to perform better than the previous initiatives, but it will take some time for the scheme to gain traction and may have a limited impact on gold prices, says a report.

According to the global financial services major UBS, India's gold schemes can do better than consensus and a significantly large proportion of respondents are likely to participate in Government's Gold Monetisation Scheme.

 The government has announced plans to facilitate deposit of gold as well as a gold bond, to hopefully monetise it into more productive use and also curtail imports, but the global brokerage said that gold price response may be muted and potential impact would only be on physical premium.

"Our base case is that it will take some time for the scheme to gain traction, especially among rural areas where a large portion of gold demand comes from," UBS said in a research note.

 The report however noted that some of the challenges to the scheme include, India's deep-rooted connection with gold suggests that a fundamental shift in mentality and attitudes is needed and this could take generations to play out.

 Much of the gold stock is in the form of jewellery and ornaments, which in many cases may have some sentimental value commercial banks and the Central Government may find it difficult to determine the right incentive to encourage the public to part with these gold holdings.

Another potential deterrent is the widespread 'under- carating' in India, which means jewellery and other gold retail products are less pure than what they should be. In case a sizable amount of gold is deposited in the long run, its impact would be more concentrated in the physical premiums.

"If the popular response is in line with our survey and those 'very willing' deposited 10 percent of their gold over five years, imports and the current account deficit could be reduced by an average 0.2 ppts of GDP per year," UBS said.

On its impact on growth, UBS said, better use of the gold stock and the direction of funds raised from auctioned gold deposits towards investment could improve growth.

The report noted that the success of the scheme would have to be far beyond what seems likely, to have a visible impact on trend real GDP growth. "As sensitivity, 1 percent of GDP switch away from gold can potentially add 0.2 percent to trend GDP growth," it said.

Moreover, the scheme is also long term positive for the equity market. "Gold is a preferred method of savings for Indians. If the above schemes reduce effective demand of gold over the long-term, it can possibly increase flow of savings into equity markets," it added.

Source: MoneyControl