The Indian government is contemplating issuing sovereign gold bonds linked to the price of gold, reports say. This initiative of the government is towards reducing demand for gold and control current account deficit, by creating an alternative to purchasing gold, reports say.

The outline draft of this initiative states that the sovereign gold bond scheme would shift part of the investment in gold, estimated at around 300 tonnes of physical bars and coins annually, to ‘demat’ gold bonds, reports say.

The Reserve Bank of India will issue the bonds on behalf of the Indian government. The bonds will be issued only to Indian residents. The issuing agency will pay distribution costs and a sales commission to the intermediate channels, to be reimbursed by the government, reports add.

The draft mentioned that the ‘cap on bonds that may be bought by an entity will be at a suitable level, not more than 500 grams per person per year’. The bonds will be issued in values of 2, 5, 10 grams of gold or other denominations; and for a minimum of 5-7 years to protect the investor from medium-term volatility in gold prices, reports add.

The government will issue bonds with a nominal rate of interest, which will be linked to international rate for gold borrowing as per the draft, reports say.

The draft mentioned that ‘an indicative lower limit of 2 per cent may be given, but the actual rate will have to be market determined. On maturity, the investor receives the equivalent of the face value of gold in rupee terms’. The rate of interest on the bonds will be payable in terms of grams of gold and the interest will be calculated on 10,000 at a certain per cent, say 2 per cent or 3 per cent, as per the draft, reports say.