India’s gold monetization schemes met with skepticism

In an attempt to put the estimated 20,000 tonnes of gold households on the subcontinent are hoarding to more productive use and alleviate pressure on its current account, the Indian cabinet this week approved two new gold savings schemes.

Announced in the finance ministry’s 2015-2016 budget, the gold deposits and sovereign gold bonds aim to monetize bullion held privately and make it easier to trade gold or use it as collateral for loans.

The bonds issued by the Reserve Bank of India have a minimum tenor of 5-7 years and will be restricted to 500g per person per year in denominations of 5g, 10g, 50g and 100g. Commercial bank gold deposits can be short term (1-3 years), medium term (5-7 years) and long term (12-15 years) and provide tax-free interest.

Livemint explains that investors are able to “redeem the short-term deposits along with the interest, either in cash or in gold. However, for medium- and long-term deposits, redemption will be only in cash and based on the market price of gold prevalent on the day of redemption.”

The success of the monetization efforts are far from assured however and the “the rate of interest to be paid has yet to be determined,” according to Tom Kendall, precious metals strategist at ICBC Standard Bank as quoted by BullionVault:

Encouraging households to put gold on deposit in these new savings schemes, “[India’s] banks will need to cover the costs of gold assays, vaulting and transaction costs, which will impact the rates they are able to offer,” Kendall points out.

“Those are likely to be a long way below Rupee cash interest rates” – currently at 4% with 8% paid on 1-year fixed deposits.

Image by Eric Kim