Why India May End the Sovereign Gold Bond Scheme: Key Insights

 What’s in today’s article?

• Why in News?
• Sovereign Gold Bond Scheme
• Concerns regarding sovereign gold bonds
• Conclusion

Why in News?

The government introduced two Bills on “One Nation, One Election” in Lok Sabha amid strong objections from the Opposition INDIA bloc.

Voting during the introduction saw 269 members in favor and 198 opposing the Bills.

Union Home Minister Amit Shah and Law Minister Arjun Ram Meghwal assured the House that the Bills would be referred to a joint parliamentary committee for detailed examination.

Sovereign Gold Bond Scheme (SGB)

• About
  • Introduce in 2015 under the Gold Monetization Scheme, SGBs are government securities issued by the RBI on behalf of the Government of India. 
  • These are debt securities linked to the value of gold.
  • SGBs are denominated in grams of gold. They are substitutes for holding physical gold. 
  • Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity.
• Features

• Each unit represents one gram of gold and offers a fixed interest rate of 2.5% per annum, credited semi-annually.
• These bonds can be traded in the secondary market and are redeemable in Indian rupees based on the average closing price of 999 purity gold from the last three business days before maturity.
• Benefits
  • Key benefits include protection against market price fluctuations, redemption flexibility after five years (with an eight-year tenor), and lower risks and costs compared to holding physical gold.

Concerns regarding sovereign gold bonds

• High Cost of Financing Fiscal Deficit
  • The government views financing the fiscal deficit through SGBs as costly, with limited benefits in terms of physical gold collection. 
  • The number of SGB tranches has been consciously reduced over time—from 10 per year to just two.
• Impact of Reduced Customs Duty on Gold
  • In July 2024, the government lowered the customs duty on gold from 15% to 6%, leading to a drop in gold prices and a surge in demand. 
  • This aligns with the government's objective to boost gold demand but diminishes the need for SGBs as an investment option.
• Decline in SGB Issuances and Borrowing Targets
  • Gross SGB issuances for FY 2024-25 were reduced to Rs 18,500 crore from Rs 29,638 crore in the interim budget.
  • Net borrowing through SGBs was also cut to Rs 15,000 crore from the earlier Rs 26,138 crore.
  • No new issuances of SGBs have been made so far in FY 2024-25.
• SGB Redemption Performance
  • SGB Series I (2016-17) matured in August 2024, providing a return of over 120% on the initial investment, with redemption prices rising from Rs 3,119 to Rs 6,938.
  • SGB Series II bonds redeemed in March 2024 yielded a 126.4% return over the investment value, excluding interest.
  • Premature redemption for bonds issued between May 2017 and March 2020 has been scheduled from October 2024 to March 2025.

Conclusion

Given the limited benefits of SGBs as an investment option and their high financing costs, the government is reevaluating the scheme's continuation.

Q.1. Why is the government reconsidering the Sovereign Gold Bond Scheme?

High financing costs and reduced relevance after the recent import duty cut on gold have led the government to reevaluate the scheme's continuation.

Q.2. What benefits do Sovereign Gold Bonds offer investors?

SGBs provide periodic interest (2.5% per annum), protection against gold price fluctuations, redemption flexibility after five years, and lower risks compared to holding physical gold.

News: Why the government could discontinue the sovereign gold scheme