Industry
Gold bondholders winners even after slash in duty
Summary
- Investors whose redemption is due in the first week of August at current rates are still earning over two-fold returns despite finance minister Nirmala Sitharaman slashing import duty on gold by 9 percentage points to 6% in the budget tabled this Tuesday and the fall in international gold prices.
Mumbai: The 7% fall in 24 carat gold prices over two days since the budget slashed import duty on the precious metal hasn't dented the returns of sovereign gold bond (SGB) investors, with those opting for early redemption this week getting the full price existing prior to the budget.
Investors whose redemption is due in the first week of August at current rates are still earning over two-fold returns despite finance minister Nirmala Sitharaman slashing import duty on gold by 9 percentage points to 6% in the Union budget tabled this Tuesday and the fall in international gold prices.
The price of gold bonds issued on 5 August 2016 was ₹3,119 per gram while the current rate of 24-carat gold is ₹6,818 per gram, a gain over two times on investment , or 10.3% compounded annual growth rate, as per Reserve Bank of India (RBI) and India Bullion & Jewellers Association (IBJA) rates.
To give context, the Nifty has compounded by 13.8% over the same period, making gold a "reasonably good portfolio diversifier, along with the interest on the issue price," according to Amol Joshi, founder, PlanRupee Investment Services, a mutual fund distributor.
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Along with capital appreciation the bond earns the holder a simple interest payable semi -annually. While the current rate of interest is 2.5% on issue price, the tranche issued in August 2016 had a coupon of 2.75%.
The RBI uses trade body IBJA's rates to price gold bonds issued on behalf of the Union government. Since Monday the price of 24-carat gold, as per IBJA, has fallen from ₹7,322 (closing rate) per gram to ₹6,818 (opening rate) on Thursday, a fall of 6.88%.
The whole effect of the duty cut -9%—appears to have not been fully captured ahead of the budget as gold in the local market was already trading at a 4-5% discount to the bank rate because of low demand, according to IBJA national secretary Surendra Mehta.
However, despite the fall because of the duty cut and international prices correcting with uncertainty abating over the Democratic candidate taking on Donald Trump, bond returns have been impressive.
"SGBs issued earlier have generated over two times returns on issue price and so the duty cut impact on profit would be a marginal 5% or so," said Shekhar Bhandari, president - Global Transaction Banking at Kotak Mahindra Bank.
"With the duty cut, consumer demand for bonds and physical gold will increase especially ahead of the festival season this September," said Bhandari .
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Apart from the full redemption of the fourth tranche of bonds next month—the first three tranches from 30 November 2015 to 29 March 2016 have been fully redeemed—those opting for early redemption coinciding with the budget week have also been spared by the 9%.
Investors who were issued gold bonds on 28 July 2017 at ₹2,830 per gram and opted for redemption on Friday this week will be able to redeem the bonds at ₹7,337, a whopping 159% point to point return or a 14.58% CAGR.
Apart from bonds, jewellers expect demand to pick up for the upcoming festive seasons after the steep price correction.
"This is a historic duty cut and we are getting enquiries from customers and our personnel are reaching out to them amid the sharp fall in prices this week," said Suvankar Sen, MD & CEO of listed jeweller Senco Gold. "We expect robust demand for the upcoming festive and wedding seasons."
Kotak Bank's Bhandari expects gold imports to potentially increase by 70-odd tonnes above the average 800 tonnes the country imports, due to the duty cut.
