India Scraps the Gold Monetisation Scheme
In a major policy shift, the Ministry of Finance has announced the discontinuation of the Gold Monetisation Scheme (GMS) from March 26, 2025. The move comes against the backdrop of rising gold prices and the scheme’s underwhelming performance. However, short-term gold deposits, which fall under the purview of individual banks, will continue.
The Reserve Bank of India (RBI) has assured that all existing medium- and long-term deposits under the GMS will remain valid until maturity, offering relief to current investors. This blog explores the reasons behind the scheme’s discontinuation, its impact on depositors, and alternative gold investment options.
Why Did the Government End the Gold Monetisation Scheme?
The Ministry of Finance cited two key reasons for discontinuing the GMS:
Underperformance of the Scheme:
Launched in 2015 to mobilize idle gold, the GMS failed to achieve its objectives. With low participation from the public, only a fraction of India’s estimated 25,000 tonnes of privately held gold was monetized.
Changing Market Dynamics:
The recent surge in gold prices has reduced the appeal of gold monetization. Investors are increasingly holding onto physical gold as a safe-haven asset, leading to diminished interest in the scheme.
Impact on Existing Gold Depositors: RBI’s Assurance
Following the announcement, the Reserve Bank of India (RBI) provided clarity on the status of existing gold deposits:
Medium- and Long-Term Deposits:
The RBI confirmed that all medium- and long-term deposits will remain valid until their respective maturity dates. Investors will continue to receive interest at the agreed-upon rates, safeguarding their investments.
Short-Term Bank Deposits:
Although the GMS has been scrapped, short-term gold deposits will continue under the discretion of individual banks. Banks will assess the commercial viability of these deposits and decide on the terms and interest rates.
How Will This Impact Gold Investors?
The discontinuation of the GMS will have varying effects on gold investors:
Existing Investors:
Current deposit holders need not worry, as their gold deposits will remain valid until maturity. Interest payments and redemption will proceed as per the original terms.
New Investors:
New investors will no longer be able to invest in medium- and long-term GMS deposits. They will have to explore alternative gold-linked investments such as Sovereign Gold Bonds (SGBs), Gold ETFs, and physical gold.
Banks:
With short-term deposits now under their discretion, banks have the flexibility to modify interest rates and deposit terms, potentially making these offerings more competitive.
Rising Gold Prices: A Key Factor Behind the Move
The government’s decision to scrap the GMS coincides with a sharp rise in gold prices. Several factors have contributed to this price surge:
Global Economic Uncertainty:
Ongoing geopolitical tensions, inflation, and a slowing global economy have increased the demand for gold as a safe-haven asset.
Rupee Depreciation:
The weakening of the Indian rupee against the US dollar has made gold imports costlier, pushing domestic prices higher.
Increased Domestic Demand:
Rising consumer demand during weddings and festivals has further fueled the increase in gold prices.
Alternative Gold Investment Options for Investors
With the GMS discontinued, investors seeking gold-linked returns have several alternative options:
Sovereign Gold Bonds (SGBs):
SGBs offer a fixed annual interest rate of 2.5% along with capital appreciation. They are backed by the RBI and offer tax benefits if held until maturity.
Gold Exchange-Traded Funds (ETFs):
Gold ETFs provide exposure to gold prices without physical ownership. They are liquid and can be traded on stock exchanges.
Gold Mutual Funds:
Gold mutual funds invest in gold mining companies or gold-linked instruments, offering diversification and growth potential.
Physical Gold:
Despite offering no interest, physical gold remains a preferred investment due to its cultural and emotional significance in India.
Challenges Faced by the GMS
The Gold Monetisation Scheme struggled with several challenges, leading to its eventual discontinuation:
Lack of Awareness:
Many investors were unaware of the scheme’s benefits, resulting in low participation.
Complex Documentation:
The scheme required detailed documentation and appraisal processes, deterring potential investors.
Low Returns:
The interest rates offered under the GMS were relatively low compared to other investment options, making it less attractive.
A Strategic Shift in Gold Investment Policies
The discontinuation of the Gold Monetisation Scheme marks a strategic shift in the government’s approach to gold investments. While the GMS failed to mobilize significant idle gold, the RBI’s assurance on existing deposits provides stability for current investors.
As the GMS comes to an end, investors are likely to explore alternative gold instruments like SGBs, ETFs, and physical gold. Banks, with the flexibility to manage short-term gold deposits, may introduce new offerings to attract investors.
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