Govt may issue Rs 15,000-crore sovereign gold bonds in H2 to curb demand for physical gold

The government plans to issue sovereign gold bonds worth Rs 15,000 crore in the second half of the current fiscal as it looks to curb demand for physical gold and raise funds through issue of such securities.

“Cabinet approval for the Sovereign Gold Bond scheme is expected within a month or so,” a senior official told PTI.

Following the approval, bonds could be issued in the second half of this fiscal, the official said.

The government is targeting to raise about Rs 15,000 crore and the issuance would be for retail investors in tranches.

The proposed scheme, which aims to shift part of the estimated 300 tonnes of physical gold bar purchased every year to demat gold bond, will be marketed through post offices and brokers on commission basis.

The bond issuance would be part of the government’s plan to borrow Rs 6 lakh crore in the current fiscal. As per the borrowing calender, the government proposed to borrow Rs 3.6 lakh crore in the first half ending September 2015. The remaining would be raised in the second half between October and March.

Besides helping the government raise funds to meet its expenses, such bond issuance would result in curbing the demand for gold which in the past had been one of the main reasons for the bloated current account deficit (CAD) which touched a record high of 4.7 percent ($88 billion) in 2012-13.

In his budget speech, Finance Minister Arun Jaitley had said: “Though stocks of gold in India are estimated to be over 20,000 tonnes, most of this gold is neither traded, nor monetised. I propose to… develop an alternative financial asset, a Sovereign Gold Bond, as an alternative to purchasing metal gold.”

As the name suggests, bonds would be issued by the Government of India with a nominal rate of interest (which will be linked to international rate for gold borrowing).

According to the proposal, an indicative lower limit of 2% may be given, but the actual rate will have to be market determined.

“On maturity, the investor receives the equivalent of the face value of gold in rupee terms. The rate of interest on the bonds will be payable in terms of grams of gold. The interest will be calculated on 10,000 at a certain per cent, say 2 or 3%,” the proposal stated.

The bonds will be issued in 2, 5, 10 grams of gold or other denominations and the tenor of the bond could be for a minimum of 5-7 years so that it would protect investors from medium-term volatility in gold prices.