Why the government could discontinue the sovereign gold scheme

The quantity of gold for which the investor pays is protected, since he or she receives the ongoing market price at the time of redemption or premature redemption. Interest usually gets credited semi-annually to the bank account of the investor and the last interest is payable on maturity along with the principal.

However, the key attractive feature of SGBs is that, on maturity, gold bonds get redeemed in Indian rupees and the redemption price is based on a simple average of closing price of gold of 999 purity of previous three business days from the date of repayment, as published by the India Bullion and Jewellers Association Ltd (IBJA).

These bonds offer a better alternative to holding gold in physical form due to lower risks and costs of storage. Investors are assured of the market value of gold at the time of maturity and periodical interest. While the tenor of bonds is eight years, it can be redeemed after five years.

What are the concerns regarding sovereign gold bonds?

The internal view in the government is that the cost of financing the fiscal deficit through SGBs is quite high and does not align with the benefits accruing to investors from the scheme.

Earlier, there used to be 10 tranches of SGBs in a year, then it came down to four and then to two. This has been a conscious way of seeing that the cost of financing fiscal deficit and the benefits accruing from physical gold collection are disjunct, officials said.

In July, the government had reduced the customs duty on gold from 15 per cent to 6 per cent — the lowest in over a decade. While this duty cut led to a decrease in gold prices, it also resulted in increased demand for the metal. Since it is not a social sector scheme but rather an investment option, the government is of the view that there are not many benefits in continuing the scheme.

Even though in the Budget presented on July 23, the government has reduced the gross SGB issuances to Rs 18,500 crore from Rs 29,638 crore in the interim budget of February 1, no issuance of sovereign gold bonds has been made so far in the current financial year 2024-25. Net borrowing through SGBs has been cut to Rs 15,000 crore from previously estimated Rs 26,138 crore.

SGBs issued under Series I of 2016-17, which were released on August 5, 2016, were due for redemption in the first week of August. These SGBs were issued at a price of Rs 3,119. The value appreciation was more than double as the price for final redemption on August 5 was announced to be Rs 6,938, in addition to the interest earned over the eight-year period.

SGB Series II bonds from 2016, which were redeemed in March this year, provided a return of 126.4 per cent over the investment value, along with the interest paid over the eight-year holding period. The RBI has also announced a window during October 2024 to March 2025 for premature redemption of the gold bonds issued between May 2017 and March 2020. Premature redemption of SGBs is permitted after five years from the date of issue of such bonds.