IB Times
Prime Minister Narendra Modi launching gold schemes on 5 November in New Delhi.PIB India

The three gold schemes launched by the Modi government recently may have the potential to perform well, particularly among rural areas, compared to such schemes rolled out in the past, according to a global brokerage firm.

Prime Minister Narendra Modi launched three gold schemes on 5 November, including the 'India gold coin' with the Ashoka Chakra minted on it.

The other two schemes -- Gold Monetisation Scheme (GMS) and Gold Sovereign Bond Scheme -- are aimed at reducing the physical demand for the yellow metal in the country.

Households and institutions in India hold an estimated 22,000 tonnes of gold directly or indirectly, which is worth about $800 billion or 39% of the country's GDP.

Through GMS, the government plans to mop up gold worth nearly Rs 60 lakh crore and customers depositing gold with banks will get tax-free interest.

"The scheme has the potential to perform better than previous initiatives. It will take some time for the scheme to gain traction, especially among rural areas where a large portion of gold demand comes from. Despite potentially better performance than previous gold schemes, we expect limited gold market impact," NDTV Profit quoted UBS Securities, as saying.

"But should more sizeable amounts of gold be deposited in the long run, the impact to be more concentrated in physical premiums as domestic supply is increased," it said.

However, the firm said that interest rates, demand and hedging of government gold liabilities could "determine" the scheme's impact on the economy.

The brokerage said imports and the current account deficit (CAD) of the country may come down by an average 0.2 percentage points of GDP per year if 'very willing' of the surveyed participants deposit 10% of their gold holding over the next five years.

"As sensitivity, 1 per cent of GDP switch away from gold can potentially add 0.2 per cent to trend GDP growth," it said.

Stock markets may see increased inflows if the government schemes result in reducing the physical demand of gold over the long-term, it said.

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