The second tranche of sovereign gold bonds, whose sale began on Monday, is likely to draw good response from investors, as they are priced below market rates for the metal and sharemarket turmoil spurs investors to diversify holdings.
India plans to sell 150 billion rupees ($2.22 billion) in gold bonds in the fiscal year ending on March 31, as it seeks to wean investors off physical gold and contain the outflow of foreign exchange spent on imports.
The price of gold has risen 4 per cent so far in 2016, while India's benchmark has fallen nearly 7 per cent.
"Given the correction in the stock market, interest is shifting in favour of gold," said Harish Galipelli, head of commodities and currencies at Inditrade Derivatives and Commodities.
"Investors are looking for safe-haven assets. This tranche will receive better response than the first tranche."
The Reserve Bank of India has fixed the issue price of the bonds, wich will be sold until Friday, at 26,000 rupees per 10 grams, below the current market rate of nearly 26,050 rupees.
The bonds, linked to the price of bullion, carry an annual interest of 2.75 per cent and allow consumers to invest in 'paper' gold rather than physical gold.
The first tranche debuted last November to lukewarm response, as it was priced nearly 5 per cent above the market. At the time, the stock market also promised better returns, with the price of gold falling in anticipation of a US rate hike.
"Given that currently risk appetite is weak and bank interest rates are also falling, demand for gold bonds in the second tranche might be better," said Siddhartha Sanyal, an India economist at Barclays.
A cut in policy rates by the Reserve Bank of India and robust growth in bank deposits, compared with credit in the last year, have prompted banks to cut deposit rates by more than 100 basis points.
"However, it is a gradual process of publicity and it will take some time for the product to become popular," Sanyal added.
The gold bonds are among measures India has adopted to damp ravenous appetite for gold imports, after a currency crisis in 2013 proved to be the country's worst since 1990.
The rupee currency hit a record low in 2013 and the current account deficit stood at an all-time high of 4.8 per cent of GDP, led by gold imports of more than $39 billion.
That compares with the 2014 figure of $31 billion and a 2015 figure of $35 billion.