Gold sovereign bonds to carry 1.5-2% interest rate

Scheme to be operationalised through designated banks; tax incentives for holders and exemption from CRR/SLR to banks could be carrot to popularise bonds

The government is considering a lower interest rate for sovereign gold bonds — announced in the Budget for 2015-16 — than that for saving bank deposits. “Interest rates on such bonds could be as low as 1.5-2 per cent, but the attractive part is that it will ensure returns in gold price, apart from the interest rates, because upon redemption, investor will be paid back amounts equivalent to the gold price on the day of redemption. However, returns in the gold monetisation scheme could be higher at three per cent,” said a highly placed source.

According to sources, the government is targeting those who are investing in gold by purchasing gold coins or bars and not those who are buying jewellery for consumption. Government research shows that every year, investors buy 350 tonnes of gold in the form of coins and bars. These investments can be channelised in sovereign bonds, which is a financial instrument.


This could be a better alternative than gold exchange traded funds where fund houses deduct their permissible expenses from invested funds and they buy equivalent gold and store it in vaults by paying charges. According to reliable sources, in sovereign gold bonds, investment will be in bonds according to the prevailing price of gold. The price will be denominated in grams and the scheme is likely to be operated through designated banks such as State Bank of India. However, the banks will not have to buy actual gold under this scheme. This means, investors will get gold returns but there’s no need to import gold.

Investors will get an annual return of 1.5-2 per cent and at maturity or redemption time, which will be paid according to the price of gold at the time.

Sovereign bonds give gold price benefits as well as additional return. However, there is a catch for banks, through which the bonds will be marketed. If there is an unusual increase in gold prices, the repayment burden increases.

The revenue department under the finance ministry had proposed several hedging options such as interest rate spread on gold deposits; gold buying-selling rate spread; permitting banks to import part of the gold sold through bonds and keep that in lieu of statutory liquidity ratio and cash reserve ratio, among others.

ATTRACTIVE OPTION

• Returns in the gold monetisation scheme could be as high as 3%
   
• The government is targeting those who are investing in gold by purchasing coins or bars
   
• Investors buy 350 tonnes of gold in the form of coins and bars every year, shows government research
   
• Bonds could be a better alternative than gold ETFs, where fund houses deduct permissible expenses