While banks are allowed to sell gold coins, they do not buy them back. Consequently, the buyer has to sell it to a jeweller at a discount that can be 5-10 per cent or even more.
The working group has recommended that banks give a two-way quote should buy it back at a transparent price and for little margin. The intention is to reduce gold imports made by banks. Gold imports have been one of the main culprits of the rising current account deficit. And around 30 per cent of the imports cater to investors, say industry experts.
The endeavour of both RBI and the government towards making physical gold more unattractive, and thereby reduce imports, has led to many innovative suggestions. What is interesting is that both the interim and final reports of the RBI committee focus on two key elements – one, many investors are investing in gold as a hedge against inflation. So, they suggest introduction of inflation-indexed bonds in which the real returns will be higher.
Two, while gold-backed instruments are recommended, the committee wants to incentivise redemptions in cash format. For instance, gold certificates which an investor can purchase in rupees and be paid an incentive, if it is redeemed in cash.
Then, there are other suggestions, including introduction of products like gold accumulation scheme, where ones use the systematic investment route to invest in small quantities of physical gold. NSEL has a product, e-gold, which works on these lines. The monthly volume of this product has risen to Rs 4,300 crore since its launch in March 2010. There are two key suggestions – a gold-linked account and pension schemes –that could help bring in a lot of change by attracting the risk averse and hoarders. If you want to invest in gold, there are three options now – gold coins, exchange-traded funds (ETFs) and e-gold. Many investors do not go for ETFs, even though these are more liquid and tax-efficient than the other two because one needs to open a separate account with a broker. If banks offer a gold accumulation account, there would be more takers.
‘Save in gold for retirement’... could be the next advertising line of banks, if they introduce pension products linked with the yellow metal. But the rate of return will be critical. The committee, by itself, admits the scheme needs to be worked out as to how it will generate inflation-adjusted returns over 20-25 years. Concerns would exist about the viability of the scheme. However, all these schemes require space to store gold. And banks do not have enough of that. Getting a bank locker, as a result, has become very expensive. Much of the success of these proposals lies in banks promoting these products aggressively.