Investors chase gold bonds in falling stock market

By Rajendra Jadhav

MUMBAI (Reuters) - The second tranche of India's sovereign gold bond received a better response than the first, a government official said, as a price discount and its safe haven appeal amid a slide in equities attracted investors.

The world's second biggest gold consumer plans to sell 150 billion rupees in bonds linked to the metal in the financial year ending March 31, to wean investors off buying physical gold and stem the outflow of foreign exchange spent on gold imports.

In the second tranche, 316,000 applications were received for 2,790 kg of gold worth 7.26 billion Indian rupees ($106 million), far higher than the 62,169 applications for the first tranche for 915.953 kg of gold in November.

"Outcome significantly better than the 1st tranche," Economic Affairs Secretary Shaktikanta Das said on Twitter on Thursday. "Scheme picking up."

The government said in a statement that increasing awareness among investors and more clarity about the provisions of the issue had helped boost interest in the scheme this time around.

The price of the bonds is linked to the price of bullion and they carry annual interest of 2.75 percent, allowing consumers to invest in "paper" gold rather than physical gold.

Prime Minister Narendra Modi made a high-profile announcement about both the bonds and a programme to mobilise gold held by households and temples for recycling, or the gold monetisation scheme.

A lacklustre response to the first bond tranche pushed the Reserve Bank of India to lower the issue price for the second tranche to 26,000 rupees per 10 grammes, more than 2 percent below the prevailing market price for the metal.

"This time the pricing was aggressive," said Harish Galipelli, head of commodities and currencies at Inditrade Derivatives and Commodities in Hyderabad.

"Besides, investors turned to gold bonds since they are a bit nervous about returns from stocks market," Galipelli said.

The price of gold has risen 7 percent so far in 2016, while India's benchmark NSE index has fallen nearly 7 percent, wiping out almost all the gains made since the election victory of business-friendly Modi.

($1 = 68.2033 Indian rupees)

(Editing by David Clarke)