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'Complex and expensive': Further tranches of sovereign gold bonds unlikely

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

The July Budget made two changes in the treatment of gold that affect investment portfolios. The reduction in import duties to 6 per cent from 15 per cent in the latest Budget lowers input costs for jewellers and compresses margins for smugglers. The
Shrimi Choudhary New Delhi
3 min read Last Updated : Aug 22 2024 | 11:53 PM IST
The Union government is unlikely to issue further trances of sovereign gold bonds (SGBs), because they are now viewed as a “complex and expensive instrument,” according to a senior government official.

Earlier this month, the Reserve Bank announced the redemption price of a SGB scheme (SGB 2016-17 Series I — issue date August 5, 2016) at Rs 6,938 for gold of the 999 purity (of one gram). This was 122 per cent higher than the issue price of Rs 3119 in August 2016.
 
Despite this appreciation, the redemption price was about 4.5 per cent lower than the average gold price in the week preceding the Union Budget presentation on July 23. Gold prices dropped following the government's decision to reduce customs duty. The 2024-25 Budget slashed the import duty on gold from 15 per cent to 6 per cent, easing costs for jewellers and aiming to curb gold smuggling.



 
Going by the Budget documents, SGB issuances were already being scaled down. According to the full-year Budget presented on July 23, the target for gross SGB issuance in FY25 has been set at Rs 18,500 crore, down nearly 38 per cent from the Rs 29,638 crore projected in February’s Interim Budget. In the previous financial year, gross and net borrowings through SGBs amounted to Rs 26,852 crore and Rs 25,352 crore, respectively. Launched in 2015, SGBs were designed as a tool to reduce physical gold imports while assisting the government in managing its fiscal deficit. These bonds offer an interest rate of around 2.5 per cent — substantially lower than the 6.5 per cent to 6.9 per cent yields available on standard treasury instruments.

Most government borrowing, managed by the Reserve Bank of India, is done through rupee-denominated bonds.
 
SGBs have an eight-year tenure, with the option for early redemption after five years. The bonds are also tradable in demat form.
For the government, SGBs provide a way to borrow at lower interest rates while reducing the country's reliance on foreign exchange for gold imports. India is one of the world's largest gold importers, alongside China. Investors benefit from both price hedging and interest payments — an advantage not available with physical gold.
 
However, the scheme has proven costly for the government in recent years. While the interest payments may be modest, the government bears the burden of gold price appreciation and currency risks. With global gold prices surging amid geopolitical tensions, the payout to SGB investors has nearly doubled, adding pressure to government finances.



Topics :Sovereign gold bondsgold loanIndian Economy

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