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RBI may revise gold bonds’ pricing mechanism to boost demand

Some bankers had blamed the pricing mechanism for the lack of any apparent enthusiasm among investors for the much-touted scheme.

, ET Bureau|
Dec 23, 2015, 01.31 AM IST
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Some bankers had blamed the pricing mechanism for the lack of any apparent enthusiasm among investors for the much-touted scheme.
Some bankers had blamed the pricing mechanism for the lack of any apparent enthusiasm among investors for the much-touted scheme.
MUMBAI: The Reserve Bank of India is looking at revising the pricing mechanism of gold bonds in a bid to improve investor appetite for such bonds, market sources familiar with the matter told ET.

The government had launched the Sovereign Gold Bond (SGB) scheme, which allows people to invest in gold without physically owning the metal, last month in a bid to reduce gold imports and keep fiscal deficit under control. Maiden sales of the bonds, however, have collected a paltry Rs 246 crore from 63,000 applications representing 917 kg of gold.

Some bankers had blamed the pricing mechanism for the lack of any apparent enthusiasm among investors for the much-touted scheme.

Under the scheme, the base price for gold bonds is taken with a week lag. But this time, due to a number of public holidays, applications for bonds came over two weeks during which gold prices dipped close to 2%.

That meant the prices of gold bond was higher than the market price of physical gold. “If prices are dipping investors will not be interested to lock in at a higher base,” said a person familiar with the development.

Sources said the central bank may now change the pricing methodology to make gold bonds more appealing to investors and help the government meet its target of selling Rs 15,000 crore worth of gold bonds by March next year.

“Developing a proper market mechanism is needed for gold bonds,” said Raghvendra Nath, managing director at financial advisory firm Ladderup Wealth Management. “While some investors can invest expecting gold prices to rise, there could be hedgers, too, buying gold bonds from the government and shorting (selling) the same in commodity futures market,” he said.

With crude oil prices almost at an 11-year low, commodity investors are increasingly turning bearish.

Gold is traditionally one of the most valued and trusted investments for Indian households. According to the All India Gems and Jewellery Trade Federation, India's gold imports could hit an all-time high of over 1,000 tonnes in 2015 buoyed by sharp fall in global prices.

However, this would impact the country’s foreign exchange reserves, and the government wants to keep the impact minimal.

Ashutosh Khajuria, executive director at Federal Bank, said gold bonds will give investors an opportunity to play with gold prices without holding them physically and help the economy by checking gold imports and foreign exchange outflows. “Secondary market liquidity (trading) along with a price discovery mechanism will make gold bonds attractive,” he said.

Gold bonds have a tenure of eight years and offer annual interest rate of 2.75% on the initial investment, no matter whether the bond value that reflects price of physical gold goes up or down. This compares with charges they may have to pay for lockers in the case of physical gold. Such bonds can also act as collateral for availing loans. There is an exit option from fifth year onwards.

The first paper form of gold investment was gold exchange-traded fund, or ETF, that saw huge inflows during the bull run between 2009 and 2011. There are roughly 12-15 ETF schemes with total asset under management of about Rs 5,800 crore.

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