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Gold Monetisation Scheme: Discontinuation of Medium and Long-Term Deposits
Context:
The government will discontinue medium- and long-term deposits under the Gold Monetisation Scheme (GMS) from Wednesday, citing market conditions and scheme performance. However, short-term bank deposits will continue at banks’ discretion based on commercial viability, the Finance Ministry announced.
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- Discontinuation of Sovereign Gold Bonds (SGB)
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- The government has also discontinued the issuance of new Sovereign Gold Bonds (SGBs), another gold-linked investment instrument.
- SGBs provided a fixed interest rate and capital appreciation benefits, but their discontinuation signals a policy shift away from gold-backed financial instruments.
About Gold Monetisation Scheme
- The Gold Monetisation Scheme (GMS) was launched in November 2015 as an improved version of the earlier Gold Deposit Scheme.
- The objective was to mobilise idle gold held by households and institutions to enhance its productive use and reduce India’s reliance on gold imports, thereby improving the current account deficit (CAD).
- The scheme comprised three components:
- Short-Term Bank Deposits (STBD) (1-3 years)
- Medium-Term Government Deposits (MTGD) (5-7 years)
- Long-Term Government Deposits (LTGD) (12-15 years)
- The Union Finance Ministry announced the discontinuation of MTGD and LTGD components from March 26, 2025.
Reasons for Discontinuation
- Evolving market conditions and the performance of the scheme led to the decision.
- The government aims to reduce future financial obligations linked to interest payments on medium and long-term deposits.
- Rising gold prices (over 15% increase in 2025) have affected the scheme’s viability.
- The interest burden for MTGD and LTGD was borne by the central government, making them financially unfeasible.
- The short-term deposits will continue at the discretion of banks, depending on commercial viability.
Impact of the Decision
- On Households and Institutions
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- Reduced incentive to deposit gold for the long term, as the interest rates (2.25% for MTGD and 2.5% for LTGD) were fixed.
- Lesser options for gold holders looking for a secure, interest-yielding avenue for their idle gold.
- Existing MTGD and LTGD deposits will continue till their maturity.
- On Banks and Financial Institutions
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- Banks had the responsibility to pay interest on short-term deposits, while the government managed interest payments on MTGD and LTGD.
- The removal of MTGD and LTGD reduces long-term gold-backed financial instruments.
- Short-term deposits remain operational, but banks will decide their viability based on international gold lease rates and market conditions.
- On the Indian Economy
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- Potential impact on gold imports: With fewer incentives for households to deposit gold, some may resort to fresh purchases, possibly increasing imports.
- Current Account Deficit (CAD) concerns: A higher demand for imported gold could worsen the CAD.
- Gold as a financial asset: The move may discourage financialisation of gold, as investors now have fewer avenues to mobilise their holdings.
- Fiscal savings for the government: The decision reduces interest outgo on medium- and long-term deposits, aiding fiscal consolidation.
Future Outlook and Policy Implications
- Greater reliance on market-driven gold instruments rather than government-backed schemes.
- Need for alternative gold-linked investment products to maintain financialisation of gold.
- Potential increase in gold smuggling if gold imports rise due to lack of monetisation avenues.
- The RBI’s upcoming guidelines on short-term gold deposits will determine the future role of GMS.
