Government's gold bond scheme receives thumbs up with 63,000 applications

The first set of sovereign gold bonds that closed on November 20 received a positive response despite falling gold prices, suggesting that the scheme may be successful in reducing imports of the metal.

The scheme received 63,000 applications for 917 kg of paper gold worth Rs. 246 crore with its opening on November 5.

Gold is trading close to a six-year low. The Finance Ministry has said that the success augured well for the next set of gold bond sales and announced tweaks to improve the appeal of the struggling gold monetization scheme.

The Reserve Bank of India had pushed the settlement date forward by four days following the enthusiastic response.

"This is a good beginning," said Sunil Kumar Sinha, principal economist at India Ratings & Research, adding that the amount is small in the context of India's gold imports.

"The government will have to do more to market it to popularise it," Sinha said. He said the investment has come from the informed investor.

India imported USD 34 billion of gold in FY15 despite high duties and restrictions imposed in 2012 after current account deficit worsened to 4.7 percent of gross domestic product in FY13. Gold imports added up to $53.8 billion in FY13.

The country imports almost 1,000 tonnes of gold every year, a reasonable percentage of which stems from investment demand. The sovereign gold bond scheme is aimed at discouraging this investment demand. Duty on gold imports is levied at 10 percent.

The first set of bonds was to be issued on November 26 has been extended to November 30 by the RBI. The bonds are being issued by the RBI on behalf of the government and will constitute part of the latter's overall borrowings. Bonds are denominated in multiples of one gram of gold and have an eight-year maturity with an exit option from the fifth year onwards. Minimum permissible investment is two grams of gold and the maximum is 500 grams per person per fiscal year.

Investors will get the benefit of a fixed rate of 2.75 percent payable semi-annually on initial value of the investment. They will also get capital gain if price of gold surges while holding the bonds.