Gold bonds receive lukewarm response

Mumbai: The government’s attempt to wean Indians away from investing in physical gold, often seen as an unproductive investment that bloats the country’s import bill, using recently introduced gold bonds appears to have got off to a slow start. Bankers, however, say that investor interest in gold bonds will pick up over time as it is marketed better and initial glitches in the structure of the product are ironed out.

In September, the government announced two products—a new gold monetization scheme and the gold bond—with the aim of converting the demand for physical gold into one for financial products with gold as the underlying commodity. While the gold monetization scheme was operationalized on 22 October, the gold bonds are on sale between 5 November and 20 November. The bonds are being sold through post offices and banks.

With just a few days left before the sale ends, only about Rs10 crore had been invested in the bonds based on data available so far, said two people familiar with the inflows. About Rs2 crore of this has come in through post offices, said one of them, a senior official at India Post, seeking anonymity as he is not allowed to talk to the press.

The official added that India Post expects to see higher inflows in the next two days as customers may come in to invest just before the bonds close for sale on Friday.

“An India Post customer is slightly different from a bank customer. Our customers take their own time to determine their interest in the product and make multiple trips to the post office before finally investing,” the official said.

The remaining Rs8 crore of investments have come in largely through public sector banks which have been selling the bonds at their branches.

Bankers said response was tepid because banks were not given enough time to market the product. While the government approved the scheme in September, the details of the scheme were announced at the end of October, just days before it went on sale.

“The main reason these bonds haven’t taken off is that we did not have any time to prepare marketing material for the product. It was announced at short notice. If there had been about 10-15 days, banks could have planned the sale better,” said the executive director of a Mumbai-based public sector lender, requesting anonymity.

Also working against bankers were the large number of bank holidays during the Diwali festive season.

The price fixed by the central bank has also acted as a dampener since gold prices have fallen considerably since then. Since the beginning of November, MCX gold prices have fallen 4.8% to 25,184 per 10 gms.

On 30 October, the government and Reserve Bank of India (RBI), while announcing the details of the scheme, said the bonds would bear an interest rate of 2.75% per annum. The price of the gold was fixed at Rs2,684 per gram.

“The rate has been fixed on the basis of simple average of closing price for gold of 999 purity of the previous week (October 26-30, 2015) published by the India Bullion and Jewellers Association Ltd (IBJA),” the RBI added.

S.K.V. Srinivasan, executive director-retail at IDBI Bank, said, “No one wants to enter a product which is negative at the beginning. Wealth advisors are not pushing the product because the price which is fixed for the gold is higher than the physical gold price today.”

Srinivasan added that most customers buying the gold bonds through IDBI Bank branches are high networth individuals. “The role of the wealth manager is critical. I believe that the next tranche will be far better because we would have learnt the relevant lessons for such a product,” he said.

Customers are also wary given that the price of gold depends on the movement of the dollar which is beyond the control of domestic policymakers. The international price of bullion tends to move inversely to that of the dollar. The dollar index that represents the currency’s movement against a basket of other units has risen to 99.51 from 87.57 a year ago.

Not all agree demand for the gold bonds has been weak. Two officials from State Bank of India said that the response to the gold bond sale has been picking up. “If we compare the response that we got to inflation indexed bonds earlier with that to the gold bonds, this has been better,” said one of the two bankers.

RBI had introduced inflation indexed bonds linked to the consumer price inflation index in December 2013. The response from retail investors was lukewarm because of the complexity in the pricing of the product.

Others say that the cultural affinity to gold will prevent Indians moving away from physical gold in large numbers.

“Gold is entwined with its purchasers in a more traditional way here, it was never a financial product. Even the gold bonds that the government kind of forced on the public during the post-war period in 1962 received tepid response. I doubt this will fare any better given it is voluntary,” said A.V. Rajwade, an independent expert and risk management consultant.

The government had introduced the sovereign gold bond as part of its efforts to reduce the dependence on physical gold in India. According to World Gold Council estimates, about 20,000 tonnes of gold is lying in Indian households. The central government also introduced the gold monetisation scheme where individuals can deposit their physical gold in bank branches and earn returns on it.