Government Scraps the Gold Monetisation Scheme
In a major policy shift, the Ministry of Finance has decided to discontinue the Gold Monetisation Scheme (GMS) from March 26, 2025. Introduced in 2015, the scheme aimed to mobilize idle gold lying with households and institutions to reduce the country’s reliance on gold imports. However, due to its lackluster performance and limited public participation, the government has decided to end the program.
The Reserve Bank of India (RBI) has assured that all existing medium- and long-term gold deposits will remain valid until maturity. However, only short-term deposits, managed by individual banks, will continue. This blog delves into the reasons for discontinuing the scheme, the impact on investors, and alternative gold investment options.
Why Was the Gold Monetisation Scheme Discontinued?
The government’s decision to scrap the GMS was influenced by the following factors:
1. Low Participation and Underperformance:
The GMS failed to achieve its goal of mobilizing idle gold. Despite India holding an estimated 25,000 tonnes of privately-owned gold, only a small fraction was monetized through the scheme. Public response remained lukewarm due to:
Lack of awareness about the scheme.
Complex documentation and appraisal processes.
Low interest rates compared to other investment options.
2. Surging Gold Prices:
The recent spike in gold prices made investors reluctant to part with their physical gold. With gold seen as a safe-haven asset amid global uncertainties, most individuals preferred holding onto their gold rather than monetizing it.
Impact on Existing Depositors: RBI’s Clarification
Following the announcement, the RBI issued a statement to address concerns regarding existing gold deposits.
Medium- and Long-Term Gold Deposits:
The RBI confirmed that all medium- and long-term deposits made under the GMS will remain valid until maturity. Investors will continue to receive interest payments as per the original contract terms.
Short-Term Bank Deposits:
Short-term deposits, which are managed by individual banks, will continue unaffected by the government’s decision. Banks will have the flexibility to determine the interest rates and terms of these deposits.
What This Means for Gold Investors
The discontinuation of the GMS will have varying effects on gold investors:
For Existing Investors:
Current deposit holders can remain assured that their gold deposits are safe.
Interest payments and principal redemption will continue as per the original terms.
For New Investors:
New investors will no longer be able to open medium- or long-term GMS deposits.
They will need to explore alternative gold-linked investment options, such as Sovereign Gold Bonds (SGBs), Gold ETFs, and physical gold.
For Banks:
Banks will continue offering short-term gold deposits.
They may introduce revised interest rates and more flexible terms to attract investors.
Why Are Gold Prices Rising?
The discontinuation of the GMS comes at a time when gold prices are soaring. Several factors are driving this surge:
Geopolitical Uncertainty:
Ongoing global conflicts and economic instability have increased the demand for gold as a safe-haven investment.
Inflation and Currency Depreciation:
The depreciation of the Indian rupee against the US dollar has made gold imports costlier, pushing domestic prices higher.
Increased Consumer Demand:
Rising consumer demand during wedding and festive seasons has contributed to the price hike.
Alternative Gold Investment Options for Investors
With the GMS no longer available, investors seeking gold-linked returns have several alternatives:
Sovereign Gold Bonds (SGBs):
Issued by the RBI, SGBs offer a fixed annual interest rate of 2.5% along with capital appreciation.
They are considered a safe and tax-efficient gold investment option.
Gold Exchange-Traded Funds (ETFs):
Gold ETFs provide exposure to gold prices without the need for physical ownership.
They offer liquidity and can be traded on stock exchanges.
Gold Mutual Funds:
Gold mutual funds invest in gold mining companies or gold-linked financial instruments.
They offer diversification and potential for growth.
Physical Gold:
Despite offering no interest, physical gold remains popular due to its cultural and emotional value.
However, it lacks liquidity and carries storage costs.
Challenges That Led to the GMS’ Failure
The Gold Monetisation Scheme faced several obstacles, which contributed to its discontinuation:
Low Public Awareness:
Many potential investors were unaware of the scheme’s benefits, limiting its reach.
Complicated Procedures:
The scheme involved detailed documentation and verification processes, discouraging participation.
Low Interest Rates:
Interest rates under the GMS were relatively low compared to other investment options, making it less attractive.
Conclusion: A Shift in India’s Gold Investment Landscape
The discontinuation of the Gold Monetisation Scheme marks a significant shift in India’s gold investment policies. While the scheme failed to gain traction, the RBI’s assurance provides stability to existing deposit holders.
For new investors, the focus will now shift towards alternative gold instruments, such as SGBs and ETFs, which offer better returns and liquidity. With short-term deposits continuing under bank discretion, financial institutions may introduce new terms to attract gold investors.
Leave a Reply