Sovereign gold bond scheme more likely to succeed: Nomura

Japanese brokerage firm Nomura has said that of the two gold schemes cleared by the government, the Sovereign Gold Bond (SGB) scheme may have a higher chance of succeeding and would potentially cut India's gold import bill.

The bonds are aimed at people buying the precious metal as an investment. Such bonds will be issued in denominations of 5 grams, 10 grams, 50 grams and 100 grams for a term of five years to seven years with a rate of interest to be calculated on the value of the metal at the time of investment. However, there will be a cap of 500 grams that a person can purchase in a year.

The bonds will be offered to only Indian citizens and institution while the securities will be traded on exchanges to allow early exit for investors.

In a report, Nomura says the bond scheme being sovereign-backed, provides an attractive investment option for households that would like to hold gold as part of their investment portfolio and earn a coupon along the way.

"Annual investment demand for gold is estimated at 300 MT per annum, which is around 35 per cent of India's gold import bill ($34 billion in fiscal year 2014-15). If some of this can be substituted by the SGB, then it could potentially cut India's gold import bill," Nomura said in a research note.

In the second half of this fiscal year (October-March), the government plans to issue Rs 15,000 crore worth of SGBs. If successful, this should lower the government's market borrowing (since SGBs will be within the fiscal deficit) and the gold import bill by a similar amount ($2.2 billion), the brokerage added.

On gold monetisation scheme, Nomura said, participation by households and temple trusts will be a challenge. "Moreover, temple trusts have historically stayed away from similar gold schemes. Also, since household jewellery will be converted into gold bars and coins, this may not be as attractive a proposition. Moreover, households with large gold deposits may be wary of tax scrutiny," it said.

"Overall, we think the sovereign gold bond scheme is more likely to succeed, and the gold monetisation scheme less so," Nomura said.

Through the Gold Monetisation Scheme, approved by the Union Cabinet, gold in any form can be deposited with banks for a period of 1-15 years that will earn interest while redemption will be at the prevailing value at the end of the tenure.