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Context:

The government has decided to discontinue medium-term and long-term deposits under the Gold Monetisation Scheme (GMS).

About the Gold Monetisation Scheme (GMS)

It was launched in November 2015 by the Ministry of Finance to make idle gold productive, by encouraging consumers to either sell their gold or deposit it with banks, so it could be brought into the formal economy.

The GMS replaced an older Gold Deposit Scheme and offered three deposit options: short-term (1-3 years), medium-term (5-7 years), and long-term (12-15 years).

Government decided to discontinue medium-term and long-term deposits under the GMS

The decision is taken due to evolving market conditions and the performance of the scheme. After reviewing its effectiveness, the Ministry of Finance concluded that these components were no longer viable.
Short-term deposits will continue at the discretion of individual banks based on their commercial viability.

How does the Gold Monetisation Scheme work?

The Gold Monetisation Scheme allows individuals to deposit gold with banks in exchange for interest. It has three components:

Short-Term Bank Deposit (STBD): Tenure ranges from 1 to 3 years, and banks decide the interest rate based on international lease rates and market conditions.
Medium-Term Government Deposit (MTGD): Tenure ranges from 5 to 7 years, with a fixed interest rate of 2.25%, decided by the government in consultation with the Reserve Bank of India (RBI).
Long-Term Government Deposit (LTGD): Tenure ranges from 12 to 15 years, with a fixed interest rate of 2.5%.

How does the discontinuation of the GMS impact India’s gold imports and economy?

The discontinuation of medium-term and long-term deposits under the GMS may reduce the inflow of idle gold into the formal economy -> Could lead to continued dependence on gold imports, especially during periods of high domestic demand.

Rising gold prices have already increased import costs, which increased pressure on the current account deficit. However, short-term deposits will still allow some gold to enter the banking system, however, at a smaller scale.

Must Read Articles:

SOVEREIGN GOLD BOND (SGB) SCHEME

ECONOMY OF GOLD IMPORT

Source:

INDIAN EXPRESS

PRACTICE QUESTION

Q. In the question given below, there are two statements marked as Assertion (A) and Reason (R). Mark your answer as per the codes provided:

Assertion (A): Gold imports contribute to the current account deficit.

Reason (R): Gold imports increase foreign exchange outflows without directly contributing to productive economic activities.

Which of the options given below is correct?

A) Both A and R are true, and R is the correct explanation for A.

B) Both A and R are true, but R is not the correct explanation for A.

C) A is true, but R is false.

D) A is false, but R is true.

Answer: A

Explanation:

India imports large quantities of gold annually, which requires significant foreign exchange payments. This increases the current account deficit because the money spent on gold does not generate direct returns or contribute to production. The reason correctly explains why gold imports negatively impact the economy, making it the correct answer.

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