The Coin Analyst – CoinWeek.com
India has proposed plans to monetize gold, and a new national bullion coin program is in the works.
On February 18, 2015, the Central Bank of India lifted its ban on the import of gold coins and medallions. While restrictions still prevent Indian banks from selling gold coins and medallions, the country is poised to enter the world bullion coin market. If India does adopt a gold bullion coin program, the nation of over one billion people–the world’s largest without an official gold bullion coin program–could quickly become a heavyweight in the international bullion coin market.
Plans For the New Indian Gold Coin
India’s Finance Minister Arun Jaitley says the new Indian gold coin would feature the Ashoka Chakra on its obverse. The Ashoka Chakra–a wheel with 24 spokes representing the dharmachakra, the Buddhist “Wheel of Dharma” or “Wheel of Law”–is one of the national symbols of India, appearing on various Indian coins and currency over the years.
Other details–such as the size, weight, and denomination of the new gold coinage–are yet to be revealed.
India’s Economic Goals and Policy Proposals
Jaitley says the new domestically-minted Indian gold coin will “help reduce the demand for coins minted outside India and also help to recycle the gold available in the country.” India is one of the largest gold consumers in the world, importing between 800 and 1,000 tons of gold annually. The country has about 20,000 tons of gold in its nationwide stocks, though most of it is neither monetized nor traded.
Two different gold policies have also been proposed: a gold deposit scheme and a sovereign gold bond.
The gold deposit plan would allow individuals and jewelers to place their gold in an interest-bearing metals deposit at a bank. The bank could then lend the gold to jewelers who need the metal and would pay interest on the exchange. Depositors could withdraw their gold during financial hardship and other times of monetary need. Interest payments from the gold transactions could amount to one trillion rupees, encouraging gold owners to spend more and banks to lend greater sums of money.
Another advantage of the gold deposit plan is that it will reduce India’s dependence on gold imports, mitigating a drain on the nation’s foreign exchange reserves and ultimately helping to strengthen the rupee. Furthermore, gold deposits will help circulate private stashes of gold currently in the hands of individuals and jewelers.
In the case of the sovereign gold bond, households can invest in a bond with a price based on a set quantity of gold and receive periodic fixed-rate interest payments, ranging from an estimated 1.5% to 2%. When the bond matures, a payment will be made to the bondholder equivalent to the underlying value of the gold on the date of maturity. This means that bondholders receive essentially the same monetary return on their investment as they would if physically selling gold for profit.
As with the gold deposit scenario, the sovereign gold bond will reduce the need for importing gold, replacing the physical exchange of the yellow metal with cash.
What Does It Mean For International Bullion Investors?
India’s new gold monetization scheme is big news for an increasingly international bullion investment market. Not only is it opening the door for increased bullion trade with India, but it also means the world market will soon have the option to invest in a new gold bullion coin from a booming nation.
In addition to the loosening gold restrictions and new opportunities for gold investment, there is the possibility that the Reserve Bank of India will significantly cut gold import duties. While specifics are presently unclear, it is widely believed the present 10% duty could be lowered by some two to four percentage points and may even plunge to as low as two percent.
With lower gold import taxes and a virtually free market, domestic Indian gold prices will likely edge downward, meaning more Indians will be able to invest in gold. However, while the minting of an Indian gold coin is intended to reduce demand for the import of gold coinage produced abroad, many Indians may still prefer gold bullion coins from other nations.