In a significant policy shift, the Ministry of Finance announced the discontinuation of the Gold Monetisation Scheme (GMS) from March 26, 2025. The move comes amid rising gold prices and underwhelming performance of the scheme. However, the government has allowed short-term bank deposits under the scheme to continue at the discretion of individual banks. The Reserve Bank of India (RBI) has clarified that existing medium- and long-term deposits will remain valid until maturity.
The GMS, introduced in 2015, was aimed at mobilizing idle gold lying with households and institutions. However, over the years, it struggled to attract substantial participation, leading the government to scrap the medium- and long-term deposit categories.
Why Did the Government Discontinue the GMS?
The Ministry of Finance cited two key reasons behind the decision to discontinue the Gold Monetisation Scheme:
Evolving Market Conditions:
The Indian gold market has witnessed significant volatility and rising prices in recent years. With global economic uncertainties and inflationary pressures, gold prices have surged, making gold monetisation less attractive for investors. The government believes that the current market scenario makes the scheme less effective.
Poor Performance of the Scheme:
Despite its objective to mobilize idle gold, the GMS failed to gain widespread popularity. According to reports, only a small fraction of India’s vast gold reserves (estimated at over 25,000 tonnes) was monetised. The lack of attractive returns and complexities in the deposit process deterred potential participants.
Impact on Existing Deposits: RBI’s Clarification
Following the announcement, the Reserve Bank of India (RBI) issued a statement to clarify the status of existing deposits.
Medium- and Long-Term Deposits:
The RBI confirmed that existing medium- and long-term deposits under the GMS will remain valid until their respective maturity dates. Depositors will continue to earn interest as per the original agreement, ensuring that current investments are protected.
Short-Term Bank Deposits:
While the government has discontinued the GMS, short-term deposits will continue to be available. However, individual banks will now have the discretion to offer these deposits based on their commercial viability. This effectively shifts the responsibility of managing short-term gold deposits to banks.
What Does This Mean for Gold Investors?
The discontinuation of the GMS is expected to have mixed implications for gold investors:
For Existing Depositors:
Those with existing medium- and long-term deposits have little to worry about, as the RBI has assured that their investments will remain valid until maturity. However, they may not have the option to renew or reinvest in the scheme once their deposits mature.
For Prospective Investors:
The closure of the medium- and long-term GMS avenues could limit investment options for those looking to earn returns on idle gold. They may now have to explore alternative investment channels such as Sovereign Gold Bonds (SGBs) or gold Exchange-Traded Funds (ETFs).
For Banks:
With short-term gold deposits now under their discretion, banks will have the flexibility to offer competitive interest rates and customize their gold deposit products. This could make short-term deposits more attractive in the future.
Rising Gold Prices: A Key Factor Behind the Move
The discontinuation of the GMS comes at a time when gold prices are hovering near record highs. Over the past year, gold prices have surged due to:
Global Economic Uncertainty: Geopolitical tensions and inflation concerns have driven up the demand for gold as a safe-haven asset.
Rupee Depreciation: The weakening Indian rupee has made gold imports more expensive, further pushing up domestic gold prices.
Increased Retail Demand: Festive and wedding seasons in India have led to higher demand, contributing to the price surge.
The government likely factored in these market conditions while deciding to discontinue the underperforming scheme.
Alternative Investment Options for Gold Investors
With the GMS discontinued, investors may consider alternative options, such as:
Sovereign Gold Bonds (SGBs): Issued by the Reserve Bank of India on behalf of the government, SGBs offer fixed interest rates and are considered a safe gold investment option.
Gold ETFs (Exchange-Traded Funds): These funds allow investors to invest in gold without holding physical assets. ETFs are traded on stock exchanges and offer liquidity.
Gold Mutual Funds: These funds invest in gold mining companies and other related assets, providing an indirect exposure to gold prices.
End of GMS – A Shift in Gold Investment Policy
The government’s decision to discontinue the Gold Monetisation Scheme marks a strategic shift in its gold investment policy. While the scheme aimed to reduce the reliance on gold imports and mobilise idle gold, its lack of success made it unsustainable. The RBI’s assurance that existing deposits will remain valid offers relief to current investors.
As short-term deposits continue under bank discretion, investors can explore alternative gold investment options like Sovereign Gold Bonds and ETFs. The discontinuation of the GMS highlights the need for innovative and attractive gold investment schemes that align with evolving market trends.
Saathee Global
