Mint Explainer: Why did the govt end the gold monetization scheme?

Late on 25 March, the government announced that it was discontinuing the medium- and long-term government deposit under the Gold Monetization Scheme, 2015, with effect from the next morning. That meant gold tendered at testing centres and designated bank branches would not be accepted 26 March morning. However, existing deposits are to continue till their redemption.

The medium-term deposits had a tenor of five to seven years, and the long-term ones were for 12-15 years. For now, only the short-term bank deposits (one to three years) are to continue, but “at the discretion of the individual banks based on the commercial viability as assessed by them”, a government press release stated.

Like the sovereign gold bond scheme, the gold monetization scheme was meant to help lower India’s imports of the yellow metal. Mint explains why the scheme has been wound up.

What was the objective of the gold monetization scheme?

Rising gold imports were widening India’s trade and current account deficits. Only a small portion of these imports was used to make jewellery for exports, for industrial purposes and as underlying assets for exchange-traded funds (ETFs). Most of it was being held by households in the form of jewellery and a small share as coins.

Gold jewellery is seen as an idle asset, as it lies in lockers and safes. The gold monetization scheme was meant to encourage households and institutions to bring out some of this gold, get it converted into pure gold and interest-earning deposits with a designated commercial bank. The scheme replaced the Gold Deposit Scheme of 1999, which had similar objectives.

It was hoped that the monetization scheme would make gold available domestically for recycling into jewellery, coins and bars, thus lowering the quantity required to be imported.

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How did it work?

The process was cumbersome. Individuals and institutions participating in the scheme had to open a gold deposit account with a designated bank. They were then required to take the gold they wanted to deposit under the scheme to a collection and purity testing centre, where the purity of the gold was tested in their presence. Adjustment in weight was made for the lower purity of the tendered gold. The centre, after assaying and melting the gold tendered, issued deposit receipts of the standard gold of 995 fineness to the depositor and informed the customer’s bank about accepting the deposit.

The scheme allowed depositors to tender as little as 10 grammes of gold—it was 30 grammes at the scheme’s launch on 5 November 2015—and choose the deposit’s tenor. Banks accepted short-term deposits on their own account and medium- and long-term deposits on behalf of the Government of India.

While banks determined the interest rate for short-term deposits, it was fixed at 2.25% for medium-term deposits and 2.5% for long-term deposits. At maturity, the depositor had the option to seek the return of principal (which was denominated in gold) either as gold or in Indian rupees, equivalent to the value of deposited gold.

Banks could sell gold received against short-term deposits to MMTC Ltd for minting India gold coins or jewellers. MMTC was to auction the gold received against medium- and long-term deposits and credit the proceeds to the central government’s account.

Did the scheme achieve its objectives?

Not really. In the nine years from November 2015 to November 2024, the scheme mobilized only 31.16 metric tonnes of gold, which is less than the weight of the metal imported in any month. India’s imports of gold during this period ranged between 700 tonnes and 1,000 tonnes a year.

While most Indians recycle some of their gold, exchanging old jewellery for new ones, a part of it is held as an heirloom. Gold has sentimental value, as most of it is held by women who receive it from their parents at their weddings.

During desperate times, Indians pawn their gold for short-term loans. This has led to the rise of gold loan non-banking financial companies (NBFCs) such as Muthoot Finance and Manappuram Finance.

The gold monetization scheme involved getting a purity test done, melting jewellery and converting it into bars, offering little incentive for households to participate in the scheme. Most jewellery falls short of the 22-carat purity, meaning individuals get much less for their gold than the perceived value.

Why was the scheme discontinued?

than the sharp rise in the price of gold, it was the tepid interest in the scheme that was a cause for its termination. In the nine years to November 2024, only 5,693 depositors tendered gold. Of the total gold tendered, 9,728kg went into medium-term deposits and 13,929kg into long-term deposits under the scheme. The balance—7,509 kg—went into short-term bank deposits.

The rising price of gold, which increases the government’s liability on maturing deposits, played a small part in the government’s decision to terminate the monetization scheme.

What options do gold owners have for monetizing the asset?

They can use traditional and more popular methods, such as selling it to their jeweller. If they need a loan, they can approach a bank or an NBFC, using gold as collateral.