Govt proposes gold-linked bonds to mobilise idle household gold

The government has proposed issuing sovereign bonds in denominations of two, five and 10 grams of gold or other sizes for a minimum term of five to seven years, which could be used as collateral for loans in lieu of gold.

The move is targeted at mobilising idle household gold in the country estimated at more than 20,000 tonnes.

The sovereign bonds, with a minimum interest rate of 2 per cent, would allow consumers to invest in 'paper' gold rather than physical gold.

The Reserve Bank of India (RBI) will issue the bonds on behalf of the government, according to a draft outline issued by the government late on Thursday.

The government expects the scheme to help meet at least part of the estimated annual demand of 300 tonnes of gold bars and coins, and reduce bullion imports so as to reduce the trade deficit.

''The main idea is to reduce the demand for physical gold,'' said a draft outline issued by the government late on Thursday.

Indians value gold as gifts, giveaways and as a store of wealth and the annual consumption in the country now stands at around 1,000 tonnes, with most of it being imported.

With the price of gold at a high, the yellow metal is now the country's second-biggest item on the country's import bill after oil.

To reduce overseas purchases of the precious metal, finance minister Arun Jaitley unveiled plans in February for a sovereign gold bond and a bullion deposit scheme.

While the deposit scheme aims to mobilise idle household gold, estimated at more than 20,000 tonnes, the sovereign bond would allow consumers to invest in 'paper' gold rather than physical gold.

The price of the bond would be linked to the price of gold and it would pay an interest rate linked to the international rate for gold borrowing.

For interest rates, ''an indicative lower limit of 2 per cent may be given but the actual rate will have to be market-determined'', the government proposal said.

The government aims to issue bonds worth Rs.13,500 crore or the equivalent of 50 tonnes of gold in the first year.