The Indian government, at a meeting of its Cabinet this morning, has given its approval to the proposal to launch gold bonds and the gold monetisation scheme that were put forward by Finance Minister Arun Jaitley when presenting the Annual Budget in February this year. Either formal legislations will have to be passed or the government will have to issue a notification before the schemes can come into effect.

The gold bond scheme has been proposed as an alternative form through which investors can put their money into the yellow metal.  The bonds will be issued by the Reserve Bank of India (RBI) on behalf of the government in denominations of 5, 10, 50, 100 grams of gold. An individual cannot purchase more than 500 grams per year. Interest rates on the bonds will be announced soon and may periodically be revised for new deposits.

The certificates can be exchanged for cash or physical gold on maturity.

It is hoped that the bonds will help reduce gold imports by attracting buyers who currently purchase physical gold for investment purposes.

On the other hand, the gold monetisation scheme aims to attract individuals and bodies (like temples and trusts) that hold physical gold by offering them interest if they deposit the gold with selected agencies. Some estimates place the amount of such unproductive gold in India at over 20,000 tonnes.

The gold deposited with the agencies will then be loaned to jewellers, thus reducing import demand from the jewellery manufacturing segment, it is hoped. The government has clarified that ornaments will not be accepted under the scheme.

It may be recalled that the high volume and value of gold imports had contributed to the ballooning current account deficit a few years ago and the government had imposed duties and various types of curbs on imports to reduce demand. The new schemes aim to tackle the problem of high imports in a different manner.