Gold Reserve Fund
Gold Reserve Fund is a fund created by the Government of India to take care of the risk associated with its two schemes – Gold Monetization Scheme (GMS) and Sovereign Gold Bonds Scheme (SGB)– due to an increase in gold price.
Gold Reserve fund is created by depositing the notional savings enjoyed by the Government in the costs of borrowing from GMS and SGB, as compared with the existing rate on government borrowings.
How it works?
GMS was launched on 22 October 2015 while SGB was launched on 5 November 2015. Both in GMS and SGB, the return/interest payable to the investor is linked to the gold price at the time of redemption / maturity, even though it is payable in rupees.
For instance, on maturity of SGB, the redemption will be in rupee only. The principal amount of investment, which is denominated in grams of gold, will be redeemed at the price of gold at the time of redemption. If the price of gold has fallen from the time that the investment was made, the depositor will bear the risk. However, if the price has risen, there is higher outgo for the Government in addition to the interest paid in the interim.
Medium and long term gold deposits under GMS and SGBs are alternate forms of borrowing for the Government. The current borrowing cost from the domestic market is around 7-8 per cent. Thus, an interest payment below this level is an yearly saving for the Government. For instance, interest payable under SGB is 2.75%. In case of GMS, the government offers a rate of 2.25 percent on medium-term deposits (5-7 years) and 2.5 per cent on long-term deposit (12-15 years). This difference in rates can be used by the Government to cover the appreciation of gold prices later on, when payable to the investors at the time of redemption.
In short, the amount received from the SGB / GMS is used by Government of India in lieu of government borrowing. However, the notional interest saved on this amount would be credited to the Gold Reserve Fund. That is, savings in the costs of borrowing compared with the existing rate on government borrowings, is what is deposited in the Gold Reserve Fund.
For instance, in case of GMS, the difference between the current borrowing cost for the Government and the interest rate paid by the Government under the medium/long term gold deposit under GMS will be credited to the Gold Reserve Fund. In other words, the benefit to the Government in terms of reduction in the cost of borrowing is what will be transferred to the Gold Reserve Fund.
The Gold Reserve Fund will be continuously monitored for sustainability. As per the present provisions, the gold deposit will not be hedged and all risks associated with gold price and currency will be borne by Government of India through the Gold Reserve Fund. The position may be reviewed in case 'Gold Reserve Fund' becomes unsustainable. The detailed guidelines on the operation of the GRF are awaited.