The Union government is unlikely to issue any more tranches of sovereign gold bonds (SGBs) because they have come to be seen as a “complex and expensive instrument,” said a top government official.
Earlier this month, the Reserve Bank announced the redemption price of the sovereign gold bond (SGB) scheme (SGB 2016-17 Series I – Issue date August 5, 2016) at Rs 6,938 for gold of 999 purity (one gram). This was 122 per cent higher than the issue price of Rs 3,119 in August 2016.
However, the redemption price was around 4.5 per cent lower than the average price of the week before the Union Budget, which was presented on July 23. Gold prices dropped after a reduction in customs duty.
The July Budget reduced the import duty on gold from 15 per cent to 6 per cent, lowering input costs for jewellers and deterring smugglers.
SGBs were already being scaled down, according to the Budget documents. This year’s full Budget, presented on July 23, targets a gross issuance of Rs 18,500 crore of SGBs in 2024-25 (FY25), which is nearly 38 per cent lower than the Rs 29,638 crore of gross issuances projected in the Interim Budget of February. In FY24, the gross and net borrowings raised through SGBs were Rs 26,852 crore and Rs 25,352 crore, respectively.
SGBs, which are a debt instrument tied to the price of gold, were introduced in 2015 to discourage the physical import of gold while helping to bridge the Centre’s fiscal deficit. The interest rate on them, at about 2.5 per cent, is much lower than the yields on ordinary treasury instruments, which currently offer 6.5 to 6.9 per cent.
The bulk of government borrowing is done through rupee-denominated instruments with auctions run by the Reserve Bank of India. The tenure is eight years, but redemption is possible after five years. The bonds can also be traded in demat form.
SGBs enable the government to borrow at low interest rates and reduce the outflow of foreign exchange—India is among the two highest gold-importing countries, alongside China. Investors, in addition to hedging, receive interest, which is not available on physical metal.
However, though the interest rates to be paid are low, the government must bear the brunt of gold price appreciation and currency risks. That is what has happened in recent years. As wars and other crises have broken out, global gold prices have risen sharply. As a result, investors are said to have nearly doubled their wealth, but the payout from the government’s coffers increased in tandem.
First Published: Aug 22 2024 | 6:35 PM IST
