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Take a look at the essential concepts, terms, quotes, or phenomena every day and brush up your knowledge. Here’s your knowledge nugget for today.
(Relevance: In 2016, a UPSC Prelims question was asked on the objective of the ‘Sovereign Gold Bond Scheme’ and ‘Gold Monetization Scheme’. Therefore, it is important to know in detail about the SGBs.)
The government is considering discontinuing the sovereign gold bond (SGBs) scheme due to the high cost of financing the scheme. The scheme aims to boost investment in gold, but the recent announcement in the Budget 2024-25 to cut the import duty on gold is in line with the scheme’s objective. 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.
1. SGBs are debt securities issued by the Reserve Bank of India (RBI) on behalf of the government, with each unit denoting a gram of gold. These bonds offer the flexibility of trading in the secondary market, providing investors with the opportunity to accrue capital gains. It is also used by the government to finance its fiscal deficit. The interest on SGBs is fixed, ensuring a predictable income stream.
2. These bonds offer a superior alternative to holding gold in physical form. The risks and costs of storage are eliminated. Investors are assured of the market value of gold at the time of maturity and periodical interest. It’s free from issues like making charges and purity in the case of gold in jewellery form. The bonds are held in the books of the RBI or in demat form eliminating risk of loss. While the tenor of bonds is eight years, it can be redeemed after five years.
3. The minimum investment in SGBs is one gram. Individual and Hindu Undivided Family (HUF) investors can invest up to a maximum of 4 kilograms in SGBs, while the maximum government-notified limit for trusts and entities is capped at 20 kilograms. SGBs allow for individual and joint holdings, with the prescribed limit applying to the first applicant in the case of joint applications. On the other hand, there is no limit on how much physical gold you can hold.
4. These bonds offer the flexibility of trading in the secondary market and the interest in SGBs is fixed at 2.5 per cent per annum on the amount of initial investment. 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 the closing price of gold of 999 purity of the previous three business days from the date of repayment, as published by the India Bullion and Jewellers Association Ltd (IBJA).
5. Certain banks recognise and accept SGBs as collateral or security for secured loans. Following the establishment of the loan-to-value (LTV) ratio, determined by the India Bullion and Jewellers Association Limited, these bonds can be treated as a form of gold which banks and financial institutions may be able to offer loans against. As for physical gold, many banks and financial institutions offer loans against gold ornaments, coins, and bullion.
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What is Fiscal Deficit? |
| The fiscal deficit is the difference between the government’s total income (including total taxes and non-debt capital receipts) and its total expenditure. It occurs when the government’s expenditure exceeds its income |
As at end-September 2024, the Reserve Bank held 854.73 metric tonnes of gold, of which 510.46 metric tonnes were held domestically — the RBI said in a report on foreign exchange reserves.
1. In value terms (USD), the share of gold in the total foreign exchange reserves increased from 8.15 per cent as at end-March 2024 to about 9.32 per cent as at end-September 2024. Gold is generally seen as a hedge against inflation and its prices have shown an uptrend over the years.
2. The RBI maintains a component of forex reserves, with foreign currency assets forming the largest part. The second-highest allocation is in gold. Gold reserves help the central bank diversify its foreign exchange holdings and also play a role in the de-dollarisation process.
3. The United States has the largest gold reserves, nearly as many as the combined total of the next three countries: Germany, Italy, and France.
Here are the current rankings of gold reserves by country in Q2 2024, as reported by the World Gold Council.
4. World Gold Council was formed in 1987 as a non-profit organisation with the aim of promoting the use and demand for gold through marketing, research, and lobbying. Its headquarters is located in London (UK), with offices around the world in New York, Shanghai, Singapore, Beijing, and Mumbai.
(Source: RBI gold bonds: Does it make sense to invest?, Why the government could discontinue the sovereign gold scheme, Top 10 countries with the largest gold reserves in 2024)
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