Study on the Government of India’s use of sovereign Gold Bond as a Financing Source

Executive Summary

In November 2015, the government of India introduced a change to the purposes of gold in India by launching the Sovereign Gold Bonds (SGB) under the Gold Monetization Scheme. In a similar project to the introduction of SGBs, the government of India announced the opening of the SGB 2017-2018 Series I(The Reserve Bank of India). The Reserve Bank of India was put in charge of the two projects designed to improve the use of gold for transactions by stopping the people of India’s reliance on various forms of physical gold such as jewelry and coins. The plan to introduce SGBs is based on the premise that it is better than the other forms of gold, and such a verdict might be appropriate given that nearly all publications on the comparison between SGB and different gold types have outlined its superiority (Yurtoğlu, p.  243). The government and proponents of the SGB project now feel that the government should make it India’s primary financing source. Still, not much is known about the superiority or inferiority of SGB over the source of the government of India’s other financing sources.

Table of Contents

Executive Summary. 1

Chapter 1. 3

Introduction. 3

1.0 Background of Study. 3

1.1       Gold in India. 4

1.2 The Sovereign Gold Bonds. 4

1.3 Research Problem.. 6

1.4        Research Objectives. 6

1.5        Research Questions. 7

1.6        Significance of the Study. 7

1.7       The USP of Sovereign Gold Bond. 8

1.8       The Pitfalls of Physical Gold. 8

1.9 SGB Availability. 8

Chapter 2. 10

Literature Review.. 10

2.1 Introduction. 10

2.2       The Risks and Disadvantages of the SGBs. 10

2.3       Empirical Literature. 11

2.4       Theoretical Literature. 14

2.4.3        General Literature. 15

2.5        The Conceptual Framework. 17

2.5.1        Sovereign Gold Bonds. 17

2.5.2        Physical Gold/Gold Coins. 18

2.5.3        Gold ETFs (Exchange-Traded Funds) 19

2.5.4        Jewelry. 20

2.5.5        Comparing the Variables. 21

Chapter 3. 24

Methodology. 24

3.1 Introduction. 24

3.2       The Null Hypothesis. 25

3.3       Procedure. 25

Chapter 1

Introduction

1.0 Background of the Study

The widespread use of physical gold, especially gold coins, in India started about 2,000 ago when the emperor of Kushan, Kadaphises Vima, first introduced them. Recently, in 2015 and 2017, the government of India launched a string of changes intended to transform the country’s gold use and market, respectively. This report focuses on the November 2015 changes to the uses of gold in India, when the government of India introduced the Sovereign Gold Bonds (SGB) under the Gold Monetization Scheme (Reserve Bank of India ). Theses government-issued denominations of securities presented in gold grams were designed to take the place of the physical gold as they are considered to be a safer investment with more benefits than the other forms of gold. For a country that has relied on other sources of finance (such as short-term and long-term bonds in local currency as per coupon rate fixed on auction method, international bonds, and loans raised from foreign sources such as the world bank and foreign countries), the idea of using SGBs for a financing sources could mean two things for India. One of which is that the adoption of SGB could give India a better source of finance than what is offered by the other sources. The second perception of this move could be a rush move made by the government if any of the other sources of finance is better than the SGB. For that reason, this research was conducted to help the government of India find a better source of financing its operations.

1.1  Gold in India

India is among the countries that top the list of the world’s largest gold markets. This factor, coupled with the growing demand for gold, makes the country one of the global powerhouses in the trade of gold. In India, gold is also tied to the cultural norms, and people consider gold a gem of value and symbol for status and wealth, which is also used in the numerous traditional rituals of the people of India. In the rural populations within the country, the deep affinity for this precious metal is associated with its practical portability. It is also considered to form security in securing a loan or jewelry business.

In Jain and Hindu cultures, gold is associated with auspicate, whether used as coins or jewels. For example, one of the Hindus’ ancient law-makers, Manu, decreed that ornaments of gold should be worn to grace important occasions and ceremonies. Besides Diwali, most Indian regional festivals are celebrated with gold ornaments. Examples include Ugadi, Onam, Pongal, and Akshaya Tritiya of the south; Gudi Pavda of the west; and Karva Chauth and Baisakhi of the north. The people of India also emotionally attached to gold and consider it central to some aspects of their life. For example, it is one of the significant items for dowry payment, which coincides with the fact that 50% of annual gold demands in India are associated with wedding ceremonies. The educated guess provided by this research is that Indians’ emotional attachment to gold and gold-related transactions is only likely to lure them to purchase more SGBs. This prediction makes SGB the best financing source for the government of India.

1.2 The Sovereign Gold Bonds

Gold bond investment is considered a game-changer because the government of India attached to many advantages. Unlike the other forms of gold, like the physical gold, the sale of SGB is restricted to the residents of India, including individuals (citizens), Undivided Families of Hindu origin, Trusts, Charity Institutions, and Universities. SGB is considered the “game-changer” in the investment of gold in India, and the following factors support such a standpoint:

• Sovereign Gold Bonds are used as loan collateral
• SGB acquisition and flexible and can be done through cash payments for a maximum of Rs.20, 000, demand drafts, through e-banking, or checks.
• SGB can be turned into DEMAT (electronic) form, which makes them a safer investment.
• SGB is Government-issued securities that are designed to offer improved investment options for gold investors
• The SGBs that a person purchases are not taxed, so the tax benefits attached to this investment is tied to the interests accrued from the trade.

Anyone who wants to invest in SGB has to fill an application form provided by the issuing banks across the country or the post offices designated for the same work. The Reserve Bank of India’s official website also offers the form in a digital form so that users can download it for use. For those who intend to use the online application approach, the Kotak Mahindra Bank and the State Bank of India are the best online platforms to visit. Every applicant is required to acquire a PAN number from the ITD (Income Tax Department), whether using the online or manual application approach.

SGBs are purchased from the branches or offices of the national (nationalized) banks, Scheduled Private Banks, DPOs (Designated Post Offices), Scheduled Foreign Banks, and the SHC (Stock Holding Corporation) of India. Investors are also required to meet some eligibility criteria before being allotted gold bonds, so some investors could be denied the golds even after sending an application through the designated programs.  The price of issuance of SGB is Rs.50 per gram less than what the online applicants pay for a nominal value.

1.3 Research Problem

The decision by the government of India to use the new for SGR (the DEMAT”/electronic gold bonds) as an alternative to purchasing metal gold is widely considered the best change to the gold industry of India. With nearly all publications and media coverage only focusing on the benefits of SGR, however, this paper holds that such a mindset is a problem in itself. Judging by the views of Bajaj (2009), other authors, and the latest reformations on India’s gold industry; the issues associated with the forms of gold, particularly physical gold, would need more than one strategy to phase out, meaning that the introduction of SGB alone is insufficient. Despite its promises, the SGB scheme must have some loopholes, drawbacks, and incapacities that this research intend to unravel to ensure that the government adopts a financing source that does not only provide a solution to the shortcomings of the other transaction currencies.  The research is also designed to solve the problem brought by the dilemmas and doubts (confusion) that could cloud the government’s decision on making SGB the primary source of finance against the other sources that it has been using in the past.

1.4  Research Objectives

This research is designed to meet the following objectives:

• To inform the government of India whether it should use the new for SGR, the “DEMAT” (electronic) gold bonds, as the primary source of financing its projects
• To compare the performance of the SGBs against those of the other financing sources to determine the feasibility of the government’s new project

1.5  Research Questions

The research on the government of India’s move to replace physical gold with SGB (Sovereign Gold Bonds) is designed to answer a pair of the following questions:

1. Is SGB the best gold form that the government should use as a financing source?
2. Is there any other form of gold that can be used to substitute physical gold rather than the SGB?

1.6  Significance of the Study

Judging by the publications, reviews, and media coverage on SGB, these government-issued denominations of securities presented in gold grams will revolutionize India’s gold industry and give investors the best option of using gold for the transaction. From a general standpoint, however, lauding the SGBs for their benefits appears to disguise some of the pitfalls that might await them if they invest significant amounts of money in the new forms (DEMAT/electronic) gold. For a study that gives a holistic review of SGB, this research intends to unravel all the factors associated with all the concepts related to the introduction of the SGBs to India’s gold industry.

Unlike the over coverage that leans towards the benefits of the SGBs to the economy and people of India, this research covers the less-discussed downfalls of these forms of gold, especially the disadvantages and risks associated with investing in gold. The study takes this path to help guide the people of India, particularly the investors, on the factors to consider when budgeting for SGB investment. The following sections review the risks, disadvantages, factors to watch out before investing in SGB.

1.7  The USP of Sovereign Gold Bond

SGB investments, as compared to directing money at physical gold purchases, come with some well-established benefits. Unlike the physical gold, which banks or jewelers sell at a premium of about 10%, SGB is sold at the price of actual gold. In addition to that, taxation of SGB is friendlier to the investors, given that its gains are not charged for interest on maturity.

1.8  The Pitfalls of Physical Gold

The government of India introduced SGB to dislodge physical gold from the market, and such a plan was introduced to help curb the pitfalls of physical gold. The people of India cherish owning gold, but they are also aware that these ornaments exist in the form of coins, bars, or jewelry, which has various design, safety, and high-cost issues that troubled them for years. The factors – coupled with the “making costs” – make physical gold a costly affair for the investors. The making charges on physical gold forms like jewelry and coins have made these investments- or non-profitable to many investors. They fall under the 6-14% range of the gold price and could rise to 25% when customers order special designs and are irrecoverable even when investors intend to use them for business (Bazaz).

1.9 SGB Availability

Although the availability is not based on the “on-tap” basis, they will not be as readily available as the physical gold. The government intends to sell SGBs in regular windows during which investors will make new purchases, meaning that the gold will not be available throughout the year. For that reason, the government plans to be presented with various primary issues of different SGB tranches for open purchase (PaisaBazaar). Typically, this program could happen every two or three months, and the purchase is left open for nearly a week. For the investors who would like to buy SGB anytime between the cycles, the best option is to purchase the earlier issues (at the right market value) that the government lists in the secondary market.

Chapter 2

Literature Review

2.1 Introduction

This chapter of the study covers the literature review of the other studies on the benefits and superiority of SGB over other gold forms. In particular, it discusses the government of India’s move to introduce the SGBs to replace physical gold like gold coins and jewelry. This section discusses the benefits of investing in Sovereign Gold Bonds, Gold ETFs, LPG physical gold (gold coins and bars), the theories on which this research is based, and the conceptual framework of the research which focuses on the independent and dependent variables, among others.

2.2  The Risks and Disadvantages of the SGBs

According to Dubey (2029), one of the disadvantages of the SGB is that its liquidity could decline over the investment period because it has an 8-year tenor. Its lock-inn period of five years is also a problem to many investors, who would now have to wait for the 5^th year to withdraw the SGB (cash value of their investment) because interests are only payable after such a period. The long wait is likely to prove intolerable for many people in India, especially those who do not only attach much value to gold but also use it for a quick fix to financial constraints. Bajaj (2009) confirmed this verdict in an article in which he explained that Indians possess more gold than the residents of any other part of the country.

He added that the people of India use these precious metals as ornaments for flaunting family possession and wealth, as insurance for various calamities, and a source of savings for retirement. Bajaj (2009) also quoted the Manappuram Group chairman, Nandakumar V. P., saying, “This (jewelry) is the credit card of the rural areas. It is the only way (collateral) that can get someone instant loans within three minutes.” An intensive review of these views poses more questions to the feasibility of SGBs than it supports the use of this form of gold for a financing source. For example, one would wonder if the people of India will be ready to drop a commodity that helps them secure a loan in “three minutes” for one with a five-year lock-in period. Other questions that cross the mind when comparing the benefits of gold include:

1. Will Indians readily accept SGBs, which requires an investment of at least 1 gram and a maximum of 4kg, when they can use the other forms of gold that need no limit?
2. Does the usability of the SGB make it a perfect fit for the rural Indians who use gold (physical gold and gold coins) as a “credit card”?

The quickest or simplest answers to these questions are “no,” the adoption of the SGB, mainly using it to replace physical gold, should not be rushed. The government of India needs to compare the benefits of gold against other forms of exchange, as well as look for proper ways of fixing the loopholes in the introduction of SGB. The holistic approach with which this paper reviewed helps both the government and the people of India make an informed decision on whether SGB is the right gold investment for the country. For the investors, the next watch out should be bused as the guidelines on whether to inject hefty sums of money on SGB.

2.3  Empirical Literature

According to Sudindra& Naidu (2019), stated that the investment in gold, especially in India, can take four forms, one of which is physical gold, which comprises of gold savings scheme (paper gold), gold coins schemes, and jewelry. The other options include digital gold, gold EFTs (Exchange Traded Funds), and the newly-introduced Sovereign Gold Bonds Scheme. The latter is considered the best alternative for investors because it offers more benefits than the other forms.

2.4  Theoretical Literature

2.4.1        The Theory of Improvement

The theory of improvement is based on observational equivalence or approximation. It holds that the underlying observations made during the execution of a program are based on intentional information on some aspects of that event, especially the costs or benefits (Earl and Timperley; M. Zey). A program is only considered an improvement of the previous one if it is more efficient. This theory drives the government of India’s belief that SGB is an improvement to the other sources of finance that India uses.

2.4.2        The Rational Choice Theory

The theory of rational choice holds that using rational calculations and deductions to arrive at a sensible decision to achieve outcomes that reflect their objectives, meaning that rationality has to the interests of the stakeholders. This theory relates and supports the government of India’s move to use SGB for a financing source, holding that SGB is a better financing source than the local bonds, international bonds, and foreign loans.

2.4.3        General Literature

India trails only China in the list of the world’s largest consumers of gold. It uses about 900-1,000 tons of this precious metal annually, allowing it to generate at least $35 billion in the same period. The people of India have strong emotional connections to gold, but their fondness of this gem of luxury appears to be a thorn to the country’s economy. The government has imported more gold, which does not only create an imbalance in the importation and exportation of gold but also stunts the growth of the other sectors of the economy. Indian consumers of gold have holed approximately more than 20,000 tons of gold. This volume of gold lies in bank lockers, so it is not mobilized or monetized through trading. This situation means that the government of India has about Rs. 60 lakh crore (judging by the current market prices) that it cannot use to boost the economy. India operates two gold schemes, GML (Gold Metal Loan Scheme) and GDS (Gold Deposit Scheme). These schemes have served the people of India over the years, but not all parties like them because they have low rates of interest, proneness to smuggling, complicated transaction procedures, and the ability to increase the current account deficit.

New gold schemes such as the SGB scheme would help the people of India monetize the remaining gold pieces that they store in the bank or home lockers. Indian’s affinity to gold means that nearly every family in the country store some gold at home, particularly in pieces of jewelry. It also makes India top other gold consumers such as Germany, Switzerland, IMF, and the US in the list of countries with large volumes of gold reserves. In the 2013-2014 period, India imported gold 661.4 tons ($33 billion) of gold, making this import only second to crude oil. The following period (2014-2015) was marked by an increase in gold importation with 967 tons imported in that period demanding about $34.4 billion.

The past two years (2017 and 2018) have recorded an increase in the demand for gold, and anyone’s guess in such a situation was that the government would increase its expenditure on gold imports. As a result, the government added more for the importation of more gold to cater for the rise in demand for gold by the Indians, which affected the country’s development plans designed for economic growth. In the views of DRI (Directorate Revenue Intelligence), about 886 kg gold (Rs. 234 crores) was grabbed in the Q1 of the 2015-2016 financial year. The incident saw the Prime Minister, Modi Narender, introduce the gold schemes based on financial investments. Part of this plan was spurred by the 2.25% drop in the October 2014 revenues from gold transactions. A year earlier, the revenues were $4 billion.

The Prime Minister’s move to increase gold importation also resonates with some of the changes to the overall consumption of gold in the country. According to the WGC (World Gold Council), for example, both gold prices in rupee and jewelry demand have increased by 400% and 75%, respectively, over the past decade. Gold demand in the rural parts of the country also continues to grow by two-thirds on a year-on-year basis. Currently, all the gold schemes that the government introduced are based on exchanging gold deposits with bonds (certificates) for a fixed interest rate and maturity period. Examples include the 15-year gold bonds with a 6.5% interest, the 1980 Gold Bond Scheme with a 7% interest rate, the 1965 National Defense Gold Bonds, and the 1993 Gold Bond Scheme.

2.5  The Conceptual Framework

The conceptual framework for this study focus on both the dependent and independent variables reviewed in attempts to advise the government of India on whether it should replace the metal (physical) gold with SGB as the country’s financing source. The research has only one dependent variable (SGB/de-mat gold bonds), while its independent variables included jewelry, gold coin, and Gold ETF. The following is a detailed review of each of the variables, with the sole focus on determining their suitability to being used as the Indian government’s source of financing.

2.5.1        Sovereign Gold Bonds

SGBs are government-issued denominations of securities presented in gold grams. They are designed to take the place of physical gold. They are bought at the price of the issue in cash and redeemed when mature in cash, too. The Reserve Bank carries the issuance of SGB as a representative of the Indian government. One of the factors that make SGBs productive is the benefits that come with them. According to the Reserve Bank of India (2019), the quantity of SGB that an investor buys remains protected because the purchase is made at the market price during premature redemption/redemption.

The SGB is considered superior to handling physical/metal gold because it has no costs or risks of storage. Indians who invest in SGB are also assured of the periodical interest and the market price of gold at maturity. Unlike jewelry gold, SGB is not affected by issues such as purity and making charges. They are held in de-mat form or the RBI books, so they are not affected by the risk of scrip loss.

By definition, coupled with the descriptions provided by the Reserve Bank of India (2019), SGB is a better fit for a financing source than the other financing sources. Sudindra& Naidu (2019) supported this observation and added that SGB is better than all the other gold investments. Their verdict resonated with their findings from a study in which they found that SGB has more benefits than the other gold forms. In another article, Dubey (2019) echoes these views by pointing out the additional benefits of SGB. For example, he states that SGB can also take the place of collateral when taking a loan.

The Government of India has a fixed assured interest of 2.5% per annum on SGB’s issue price, and it is paid after six months (half-yearly), while the last installment and the principal are paid at maturity. In the views of Dubey (2019), the SGB scheme should be a lucrative investment project because it has to lure taxation benefits. For starters, tax deducted at the source (TDS) is not applied to the interests. In a notification, the RBI explained that individual investors would be exempted from the taxes on capital gains that arise on redemption. If LTCG arises to any investor when transferring SGB, then he/she will receive indexation benefits.

Nearly everything that the government or the other institutions says about the SGB points towards the benefits that the investors will draw from it. However, it is what the issuer (the government of India) from the SGB transactions that make it suitable for financing source to the government of India. According to the Reserve Bank of India, the government of India, and other relevant organizations, the issue price of SGB is Rs.3, 835 ($53.42) per gram. The maximum limits of SGB that HUF (Hindu Undivided Family) and trusts can subscribe in a fiscal year are 4kg and 20kg, respectively. The investors earn a 2.5% interest at maturity, which is a minimum of a 5-year lock-in period. The following table gives a simulation calculation of what goes to the government from SGB transactions. The assumption is that 300 million Indians shall have purchased at least 1 gram of SGB in 5 years:

A subtle interpretation of the table is that the government of India can get at least $16 trillion from SGB purchases if 300 million Indians buy the least amount of SGB (1 gram denominations) in 5 years. If additional one million people the HUFs and trusts purchase the maximum denominations of 4kg and 20kg, then the sum of money that the government can make from these transactions would exceed $50 trillion in the same period (mind-blowing). What is most interesting in these simulation calculations is that the government needs only 50 million Indians to buy the least amount of SGB (1 gram denominations) in 1 year to get $2,671,000,000, which eclipses its GDP ($2,597,000,000) by $74 million (World Bank). For a country with a population of 1,366,417,754 people, as of 2019, these values are eligible (United Nations).

A more straightforward interpretation of the SGB scheme as a source of finance is that it is a “soft” loan that the government borrows from the public for a minimum period of 5 years and pays back with a 2.5% interest. Judging by the simulation, the fact that the government can get as much as $16 trillion in 5 years and payback with only 2.5% for an interest appears as a steal. No bank or money lending institution in the world can give such a hefty sum of money for such a low-interest rate in 5 years.

The most exciting part of this simulation is that the government gets loans that surpass its GDP for four consecutive years without having to pay anything back. It should be noted that not everyone withdraws his/her investment at maturity and that some people will be making purchases at the same time. The terms of transaction and payment make SGB the best source of finance that the government of India can use to run its projects.

2.5.2        Local Short-term and Long-term Bonds

They refer to debt instruments that allow investors to lend (loan) money to entities such as a government or corporate, which borrows funds for a particular period at a fixed or variable interest rate. Companies, sovereign governments, municipalities, and states use bonds to raise money used in financing different projects. The owners are referred to as issuers, creditors, or debt holders. Short-term and long-term bonds in local currency as per coupon rate fixed on auction method fall under borrowings in which the public becomes the government’s source of finance by giving it loans through bonds and deposits, among other forms. On the other hand, the government can also provide loans to the public to earn interests.

In India, the government has G-Secs (Government Securities), which refer to instruments of trade issued by either State Governments or Central Government. These securities acknowledge the obligation to debts owed to the government. They could be short term with a maturity period of less than a year or long term with an original maturity period of at least one year. Examples of short-term G-Secs include treasury bills, while the long-term ones are dated securities and Government bonds. In India, the issuance of treasury bills and traded securities or bonds is carried out by the Central Government. In contrast, the State Governments deal with issuing only dated securities or bonds, which are referred to as SDLs (State Development Loans). Since they have no default or risks, G-Secs are referred to as risk-free instruments with gilt-edges (Reserve Bank of India ).

2.5.3        International Bonds

In addition to the local bonds, the government has also had to rely on international bonds to fund its projects. In an article, Badarinath explained that India plans to become the last G20 country to enter the global debt market by launching it’s a $10 billion foreign bond for the first time in history. $10 billion is not enough for the government’s project budgeting, and cannot be used for the primary source of finance given that it has not yet been purchased (Beniwa, Goyal, and Joshi). One of the questions that cross the mind is, “What source of finance will the government use as it waits for a buyer?” The government itself does not seem to prefer using international bonds because it plans to use the money raised from it to offset its debts to other foreign lenders.

2.5.4        Foreign Loans

When discussing the government’s plans to sell its international bond for $10 billion, Badarinath added that the bond is intended to introduce a shift in the borrowing pattern used by the Indian government, which is valued at $104 billion as per the current (2019-2020) fiscal year. Badarinath also explained that the government of India looks to leverage the extremely external debt at a 5% debt-to-GDP ratio. This move is designed to steer low-cost funds to finance part of the country’s fiscal deficit. According to Badarinath, the total external debt of India was estimated by the Reserve Bank of India at $543 billion.

2.5.5        Comparing the Variables

The following table gives an overview comparison of the three primary forms of gold used as a financing source in India –: short-term and long-term bonds in local currency as per coupon rate fixed on auction method, international bonds, and loans raised from foreign sources such as the world bank and foreign countries.

2.5.6        Discussion of the Table

In addition to bringing a substantial amount of money to the government, SGB charges the lowest interest rates against the amount to be raised at maturity. With SGB, the government will not have to deal with the pressure of fighting time of payment. Instead, it will have the money to pay back the lenders (people of India) and even get more funds at the same time. Foreign loans might have lower interest rates than SGB, but they will leave the government with a deficit of the same amount (Press Trust of India; The World Bank; TheGlobalEconomy.com).

On the other hand, the government pays no interest in international bonds, but it has to rely on the mercy of the other countries to buy the bond. With critics opposed to the government’s sale of the $10 billion bonds for fear of exposing the country economic risks, the government could pull out of the deal, showing its little trust in using international bonds for a financing cost (Kazmin). These factors, coupled with Indians’ emotional attachment to gold and gold-related transactions, make SGB the best financing source for the government of India.

  Chapter 3

 Methodology

3.1 Introduction

This study uses the qualitative approach, so it is theoretical to review a set of past studies on various sources of financing that the government of India has used over the years to determine whether SGB can be a better financing option.  The primary objective of this study is to inform the government of India to determine whether it should use the SGR as a source of finance rather than relying on short-term and long-term bonds in local currency as per coupon rate fixed on auction method, international bonds, or loans raised from foreign sources such as the World Bank and foreign countries. The study reviews a set of journals, websites, peer-reviewed articles, books, and magazines on these issues related to the research topic.

An intensive review of this object reveals the assumption (hypothesis) that Demat gold is better financing than any of the other three alternatives.  However, whether such a verdict is the best judgment by the government of India remains unclear. For that reason, this research also reviews past studies on the other sources of financing to gauge the superiority of the Demat gold bond over them as well as advice the government of India to adopt a different financing source should the researchers identify a better option. In addition to past research on different financing sources, the study also borrows the provision of the National State Exchange and Reserve Bank of India.  The other forms of gold purchasing sources discussed in this paper include short-term and long-term bonds in local currency as per coupon rate fixed on auction method, international bonds, and loans raised from foreign sources such as the World Bank and foreign countries

The comparison of these financing sources was made through the multiple regression process.  This procedure was used because this study involved three or more variables to measure.

• The dependent variable for the study was the performance value of the demand gold bond.
• The independent (X) variables for the study were the performance levels/value of short-term and long-term bonds in local currency as per coupon rate fixed on auction method, international bonds, and loans raised from foreign sources such as the World Bank and foreign countries.

3.2  The Null Hypothesis

The null hypothesis of this methodology was that there existed no relationship between the Y variable (DEMAT gold bond) and the X variables. The X variables include short-term and long-term bonds in local currency as per coupon rate fixed on auction method, international bonds, and loans raised from foreign sources such as the World Bank and foreign countries. For that reason, the fit of the observed DEMAT gold bond (Y) value to those that were predicted by his methodology were more – or – less the same as what one would get by chance. Since each of the X variables also have a null hypothesis, adding the X variables to the multiple regression used in this study did not change the equation any more or less than such a result would not have been attained by chance.

3.3  The Procedure

1. The basic formula/equation used for this study was:

Y_exp = a + b₁X_{1 +} b₂X_{2 +} b₃X_{3 …}

Where:

Y_exp= the expected SGB (Y) value for a set of short-term and long-term bonds in local currency as per coupon rate fixed on auction method, international bonds, and loans raised from foreign sources such as the world bank and foreign countries values.

b₁= estimated the slope of Y regression on X₁ if the other variables of X are kept constant. This concept was repeated for b₂ and b_3.

a = the intercept

2. The coefficients of partial regression (b_1, b₂, and b₃) and the intercept (a) were calculated to help reduce the squared deviations between the observed and expected values of SGB.
3. The following values were found from the calculation of multiple regressions:

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