Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
How to make Indians let go of gold - Outside View by S.S. TARAPORE

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

How to make Indians let go of gold
Nov 16, 2015

The new gold schemes try to do precisely this. The Sovereign Gold Bond scheme marks a watershed

India has historically been a large importer of gold and the total stocks in the country are estimated upwards of 20,000 tonnes. Periodically, when the balance of payments current account deficit (CAD) goes out of control, drastic measures are taken to reduce gold imports.

From 1939 to1992 there was a total ban on the import of gold. When the regime was tightened, illicit imports rose; when the regime was less rigorous illicit imports were lower. After 75 years of trying to use a regime of controls, attempts are now being made to understand consumers' needs and measures are being introduced to encourage a move away from the physical holding of gold.

The schemes

The three schemes introduced on November 5, 2015 are the Gold Monetisation Scheme (GMS), the Indian Gold Coin Scheme (IGCS), and the Sovereign Gold Bond Scheme (SGBS). For the first time the authorities have attempted to devise schemes that meet the varying needs of consumers.

Gold monetisation: The GMS requires holders of gold in India to deposit their gold with banks after assaying. The gold in jewellery or other form will be melted down and the depositor will get a certificate placing the deposit for varying maturities - short, medium or long. Commentators have rightly pointed out that this scheme is crucial to unearthing gold hoards. While some holders of jewellery may deposit gold, most individuals would not place gold deposits. The individual holder will lose substantial value on melting down the gold and then on maturity converting it back into jewellery. Moreover, if individuals place their gold they would certainly not want to have their gold jewellery melted down for 1-3 years.

It is holders of large quantities such as temples and trusts that have huge stocks of bars who would not mind placing their stocks for longer periods as the rate of interest would be 2.25-2.5 per cent. The viability of the scheme would be on the collected gold being lent out to users of gold who would pay much higher interest rates and reduce imports. The advantage of this scheme is that the agencies (banks/government) would not be exposed to a price risk.

Gold coins: The IGCS would try to divert the demand from imported coins to Indian coins using the GMS for sourcing the gold for producing coins. As such, the success of the IGSC is contingent on the GMS being a success. The agency selling the gold (banks/government) will have to build into their sale price to the agencies minting the coins the projected price of gold at the time of maturity of the deposit.

Gold bonds: The SGBS is the instrument with the greatest potential to persuade the holder of physical gold to switch to a gold price-linked paper instrument. According to the scheme, the investor subscribes to the SGBS in rupees and at the end of eight years gets back the maturity value, in rupees, of the number of grams subscribed at the price prevailing on maturity. There is a proviso for redeeming the bond at the end of five years and there would be a secondary market. The bonds are for subscription only between November 5 and 20, 2015.

The whole process grinds slowly and in a number of bank branches, even in metropolitan areas, application forms are not available. The minimum subscription is 2 grams, the maximum 500 grams. The government has indicated that it is targeting to mobilise a total of Rs. Rs. 15,000 crore and could close the issue of the bond even earlier than November 20. The scheme is really good and in the longer run could wean off Indian holders of physical gold to holding gold paper.

Attending to the glitches

There are, however, some glitches in the scheme that need immediate attention. First, even during this short period of November 5 to 20, the subscription price which, initially, would be Rs. 2,684 per gram, would change each week. With the subscription price fluctuating from week to week, bank delays and investors needing time to understand this instrument, subscriptions during this period would be meagre. This should not be interpreted as a failure of the scheme

Secondly, for SGBS, there should be a clear arrangement at the inception as to how the gold price exposure would be covered. There could be two alternatives: (i) The government would need to buy a gold option but one wonders if such cover is available for eight years. (ii) The government could build a gold price redemption reserve where it would put in an amount equivalent to the difference between the 2.75 per cent interest on the SGBS and the eight-year yield on government bonds. The second option appears to be more feasible.

Thirdly, the government should, by an early date, announce that in view of the logistics of making the scheme available over a wide geographical area, the period of the bond could be extended or preferably put on tap with a proviso that the government could close subscription at any time.

Venkitaramanan bonds

Most investors need protection if the gold price goes up relative to other instruments and a secular fall in the gold price is unlikely.

The SGBS is a path-breaking instrument. When S Venkitaramanan was governor of the Reserve Bank of India, he had mooted this instrument in 1991-92 and it was announced in the Budget of February 1992 that a Gold Bank would be set up - the reversal of this decision is a sad historical saga. It would be fitting if, in popular parlance, the SGBS is labelled the 'Venkitaramanan Bonds'.

Please Note: This article was first published in The Hindu Business Line on November 13, 2015.

This column, Maverick View is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Freepress Journal, is titled Common Voice.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "How to make Indians let go of gold". Click here!


More Views on News

BSE Sensex at All Time High; ONGC Among Top Gainers (Market Updates)

Jul 18, 2018 | Updated on Jul 18, 2018

Markets all time high analysis : The bse sensex at all time high; ONGC among top gainers. Find the latest update, special reports and news on all time high gainers of BSE Sensex at equitymaster.com.

BSE Sensex at All Time High; ONGC Among Top Gainers (Market Updates)

Jul 18, 2018 | Updated on Jul 18, 2018

The BSE Sensex has hit an all-time high at 36,748 (up 0.5%) with ONGC among the top gainers.

Two Meetings That Nailed the Idea of Owning Brilliant Smallcaps Without Buying Them (The 5 Minute Wrapup)

Mar 22, 2018

Certain blue chips hold the potential of delivering returns comparable to small-cap stocks. With these stocks, you can get the best of both worlds.

A Sense of Melancholy (Vivek Kaul's Diary)

Jul 18, 2018


Mere Paas HRITHIK Hai... The Mother of All Trading Stocks (Profit Hunter)

Jul 18, 2018

You are missing out big gains if you don't own these 8 stocks.

More Views on News

Most Popular

How to Avoid a 90% Loss Suffered by This Super Investor(The 5 Minute Wrapup)

Jul 12, 2018

Blindly following super investors is a dangerous game to play. Here's how you can avoid such mistakes.

The Answer to Your Wealth Worries: Small Caps (Especially Now)(Profit Hunter)

Jul 10, 2018

If you're worried about the markets - you are on the wrong track. This is opportunity - put your wealth-building hat on, instead - Richa shows you how...

The Multiple Problems with the Minimum Support Price (MSP) System(Vivek Kaul's Diary)

Jul 11, 2018

The price signals that MSP sends out, creates its own set of problems.

New Fund Offer - ICICI Prudential Pharma Healthcare and Diagnostics Fund - Should You Invest?(Outside View)

Jul 6, 2018

ICICI AMC launches an open -ended equity fund following Pharma, Healthcare, Diagnostic and allied theme.

When Disappointment Panda is Around. Buy Quality Stock like This!(Chart Of The Day)

Jul 6, 2018

Buy Companies that can fight all kinds of Pandas and Bears in the long run.


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Jul 18, 2018 03:37 PM