Reining in imports: Govt proposes gold-linked bonds at 2% interest, 5-7 year maturity

India is planning to issue sovereign bonds linked to the bullion price in an effort to divert some of the estimated 300 tonnes of annual demand for gold bars and coins and curb bullion imports, which can push up the trade deficit.The Reserve Bank of India, the central bank, will issue the bonds on behalf of the government, with a minimum interest rate of 2 percent, according to a draft outline issued by the government late on Thursday.[caption id="attachment_2253632" align="alignleft" width="380"] Reuters[/caption]"The main idea is to reduce the demand for physical gold," according to the draft.Indians prize gold as gifts and as a way of storing wealth. The country consumes nearly 1,000 tonnes of gold every year, most of it imported, and gold is the second-biggest expense on the 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 percent may be given but the actual rate will have to be market-determined", the government proposal said.The sovereign bonds would be issued in denominations of two, five and 10 grams of gold or other sizes for a minimum term of five to seven years and they could be used as collateral for loans, it said.The government aims to issue bonds worth Rs 13,500 crore ($2.12 billion) or the equivalent of 50 tonnes of gold in the first year.It invited the public to comment on the plans by July 2. Reuters