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India Re-Launches Gold Schemes as Imports Jump

Sovereign Gold Bonds and Monetisation offers improved after poor response from India's households...
 
INDIA'S gold demand continues to defy government attempts to reduce and reshape it, writes Steffen Grosshauser at BullionVault, with New Delhi this week re-launching two key schemes to try and cut imports even as the latest data show legal inflows surging once more.
 
The Sovereign Gold Bond scheme – finally unveiled by prime minister Narendra Modi in November – aims to encourage consumers to invest in 'paper' gold, rather than physical metal, earning a rate of 2.75% annual interest and with capital repayment linked to moves in the gold price.
 
Following the poor response to late-2015's launch, the second issue – closing today – has been offered below gold-market prices, effectively giving investors an immediate paper profit. 
 
The Gold Monetisation scheme meantime, also aimed at curbing gold imports, will now pay participating banks a 2.5% commission for the gold they collect from private holders – gold which can then be melted down and used to meet new demand in the world's No.1 consumer market.
 
Effectively converting their jewelry or bullion into a gold-denominated bank account, customers putting their metal on deposit are also now able to redeem this product after just 3 years, rather than the 5-7 years or 12-15 years lock-in periods set at November's launch, albeit with a cut to the rate of interest – also paid in gold on redemption – of 2.25% for the medium term or 2.50% for the long-term package.
 
India's trade deficit – which surged above 5% of GDP in 2013, leading the then-Congress Party government to impose a near-ban on gold imports – widened in December to its highest level since August, the Commerce Ministry announced in a statement on Monday.
 
The overall 4% decline of imports was countered by a 179% surge in gold shipments, likely triggered by the Indian wedding season and lower global gold prices.
 
"The main objective of the [Bond] scheme," said the Finance Ministry this week, "is to reduce the demand for physical gold and shift a part of the gold imported every year for investment purposes into financial savings."
 
India imports an average of around 900-1,000 tonnes gold every year, according to London-headquartered market development organization the World Gold Council.
 
With an estimated 20,000 tonnes of gold in private hands and temples, the Indian government was expecting to collect 10-15 tonnes of gold in the first year. But many analysts think it is very unlikely to achieve this level.
 
"Under a previous scheme set in 1998, it took 15 years to collect 15 tonnes," comments Somasundaram PR, the World Cold Council’s MD for India.
 
The new Gold Monetisation Scheme only collected 0.4 kilograms in the first two weeks after launching.
 
The second tranche of the Sovereign Gold Bonds scheme is expected to receive a better response from investors than the first phase, reckons Siddharta Sanyal, India economist at Barclays, with investors now exempt from capital gains tax on redemption.
 
But "in India," counters Abhiroop Mukherjee, senior manager-fixed income at Motival Oswal AMC, "people generally consume and do not invest in gold. The metal is deemed auspicious and has ornamental and sentimental value.
 
"That is the key reason we believe the scheme would find few takers initially."

Steffen Grosshauser is Senior Operations Executive and Head of German-speaking Market at BullionVault, the worldwide biggest physical gold and silver market for private investors.

See all articles by Steffen here.

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