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With bonds, government is coming for your gold

Consumer: Article on gold monetisation

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The government is proposing sovereign-backed gold bonds where individuals can buy gold bonds instead of investing in physical gold. The bonds will carry a fixed rate of interest and holders will be able to redeem them in cash on the face value of gold.

The government is also planning a gold monetising scheme to utilise an estimated 20,000 tonnes of gold available with individuals which are stashed away in homes of the investors or in bank lockers. However, the finance minister did not specify details of the scheme or by when it will be launched.

With inflation being in double digits in the last few years, real effective interest rate on bank fixed deposits were negative. This forced large investment into physical gold as an insulation from inflation. The government is also planning to launch gold sovereign bonds as an alternative to buying the metal both the moves are expected the steep gold imports of about 800 to 1000 tonnes annually. However there is no change in the 10% import duty on gold.

FM said, "I want to make domestic public savings to 36 % of GDP from 30.6 % at present." The domestic savings in the country have been falling from 33.72% in 2010-11 to 30.6% in 2013-14.

Arun Jaitley also added that work will also start on an Indian gold coin to cut demand for foreign-minted coins."Such an Indian gold coin would help reduce the demand for coins minted outside India and also help to recycle the gold available in the country," he said.

VP Nandakumar, MD and CEO Mannappuram Finance limited said, " the proposed new initiatives of gold bonds and gold monetising schemes are good. We believe it is the ideal way to reduce the import of gold and to unlock the value of our large stockpile of gold."

Household savings continue to be the largest contributor to gross capital formation. Household savings has two components- financial and physical, where the latter typically does not lend itself easily to financial intermediation in the economy. Gold formed about 15.8% GDP in 2011-12 then came down to 14.8 % in 2012-13 and 10.6% in 2013-14 while financial savings formed 7.2 % of GDP in 2013-14 and remaining around the same levels in the past four years.

Moderated gold imports will also help sustain a manageable current account deficit. Since the elimination of restrictions on gold in November, gold imports have fallen well below the elevated levels seen in 2013. Declining international prices as well as moderating inflation have meant that gold imports averaged $1.3 billion in December 2014 and $1.6 billion in January 2015 compared with $4.2 billion in October 2014 and $5.6 billion in November 2014.

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