The government of India plans to introduce sovereign bonds associated with gold prices to reduce gold imports.
India consumes practically 1,000 tons of the precious metal annually and most of this comes from imports. According to viable sources, it is the second largest expenditure next to oil products.
Sovereign gold bonds are government-issued certificates which confirm that an investor purchased a specific amount of the yellow metal. The bond’s value is linked to current prices in the market. Said bonds will serve as option instead of buying physical gold.
These will generate an interest rate that matches global market rate for gold borrowing. However, the actual cost will depend on the market although there is a lower ceiling of two percent.
Upon maturity, investors earn the market value and profit if it goes up. Maturity has been pegged at a minimum of five and maximum of seven years. Bonds can be sold without restrictions or traded in commodity exchange facilities. There will be denominations of two, five and 10 grams but these will be confined to domestic enterprises in the country. The bonds may also be utilized as loan collateral.
Taxes will be the same for exchange traded funds and physical products so investors will pay taxes (20 percent) on capital gains with indexation for a period of three years or more. Indexation is the process of adjusting acquisition costs versus inflation for asset values.
Stakeholders in India say gold bonds reduce the need for investors to check quality of the commodity which is usually an issue in making purchases from local jewelry businessmen, according to India Ratings. It is a risk for retail traders, according to the local research firm.
Many analysts support the system’s framework even as details have not been completed. In fact, investors may find these bonds a better investment compared to physical inventories.
It is widely believed that the Indian government is inclined to issue sovereign bonds in the amount of 13, 500 Crore which is equal to 50, tons during the first year.