Why in news?

The government is considering ending the sovereign gold bond scheme due to its high financing costs. Initially launched to boost gold investment, this objective has been addressed by the recent reduction in gold import duty announced in the 2024-25 Budget, which has increased gold demand.

Earlier reports indicated concerns over using sovereign gold bonds to finance the fiscal deficit, prompting a review of the scheme's continuation.

What’s in today’s article?

• Sovereign Gold Bond Scheme
• Concerns regarding sovereign gold bonds
• Conclusion

Sovereign Gold Bond Scheme (SGB)

• About
  • Introduce in 2015 under the Gold Monetization Scheme, SGBs are government securities issued by 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.