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Government may issue gold bonds

You may soon have options to invest in new financial instruments that are linked to gold, such as a possible gold bond, Mahua Venkatesh and Anupama Airy report. Tapping the yellow fever

business Updated: Nov 21, 2012 22:41 IST

You may soon have options to invest in new financial instruments that are linked to gold, such as a possible gold bond.

With savings rates dropping from 35% about five years ago, the government, trying to boost savings and discourage hoarding of gold in physical form as a speculative activity, is planning to soon come out with attractive paper products including gold bonds, riding on India’s craze for gold.

Though the details are yet to emerge experts say that in such instruments, investors may be allowed to invest cash or offer gold against an assured minimum return.

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At the time of maturity investors are given the option of receiving gold or cash. The funds raised are likely to be used to build infrastructure projects. The government is expected to offer soverign guarantee to notified companies that can sell such bonds and back it up with hedging in global gold markets to assure minimum returns linked to the metal.

Top government sources told Hindustan Times that a gold instrument proposal was discussed at a recent high-level meeting on efforts to boost savings and investment rates in which the chairman of the Prime Minister’s Economic Advisory Council (PMEAC), C Rangarajan, and finance minister P Chidambaram were present.

“As the recent RBI data showed a declining trend of savings by Indian households including bank deposits, it was suggested in the meeting that in order to attract household savings, paper products that are linked to gold be developed,” a finance ministry official said.

Asked what would be the nature of these instruments, the official said, “We are still in the process of working out options, gold bonds could be one of them.”

In the past, India has never issued gold bonds but banks have gold deposit schemes that have not been very successful.

With gold prices soaring in the last couple of years, officials said there is a good chance that the new schemes would find takers unlike the past gold-linked schemes that were on offer that did not do well because investors preferred stocks that then offered higher returns. Now, with stock markets hit by high interest rates that lowered corporate earnings amid a global economic crisis, gold is treated as a safe haven.

Uncertainty in the stock market coupled with US fiscal cliff fear would favour gold and schemes and instruments linked to gold are likely to succeed,” said senior economist D H Pai Panadikar.

However, a official in the Planning Commission said, “Breaking the trend of India households that are keen to hold gold in physical form to parking funds in instruments that are linked to gold will take time and may not happen immediately.”

India is the largest consumer of gold in world and investment in gold — mostly bought as coins, jewels and bars.

India and China account for nearly 50% of world demand for gold either as jewellery or investments. This year, India imported gold worth $60 billion amid rising prices, while in 2011, it was worth $40 billion, putting pressure on the country’s current account deficit that may in turn depreciate the rupee.

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