Centre discontinues Sovereign Gold Bond scheme due to high cost of borrowing

No new tranches of SGBs have been issued in the current fiscal year.

Centre has decided to discontinue the Sovereign Gold Bond (SGB) scheme, citing high cost of borrowing associated with the instrument.

Finance Minister Nirmala Sitharaman confirmed the decision during the post-Budget media briefing on February 1, when asked about the future of the SGB scheme. "Yes, in a way," she said, acknowledging the discontinuation of the scheme which was launched in 2015 to curb physical gold imports.

“These are the decisions which are taken with the purpose of raising borrowings from the market, for the purpose of financing the Budget, and at some point of time, whether this asset class is to be supported or not. The recent past experiences have been that this has been a rather fairly high-cost borrowing for the government. As a result, the government has chosen not to follow that path,” Economic Affairs Secretary Ajay Seth explained at the briefing.

Despite an allocation of Rs 18,500 crore for SGBs in the FY25 Budget – down from Rs 26,852 crore in the interim Budget – no new tranches of SGBs have been issued in the current fiscal. The Reserve Bank of India (RBI) last issued SGBs in February 2023, amounting to Rs 8,008 crore. Since its inception, the total issuance under the SGB scheme has Rs 45,243 crore as of FY23, with an outstanding amount of Rs 4.5 lakh crore by March 2023.

The SGB scheme was introduced in November 2015 as an alternative to physical gold, allowing retail investors to invest in paper gold. The bonds had an eight-year maturity period, with partial redemption allowed after five years. Initially, the interest rate on SGBs was set at 2.75% per annum, later reduced to 2.5%, which remained fixed for the entire tenure of the bond.

A senior government official had earlier highlighted the high returns that investors have received on SGBs. “We have given 9-11% return per annum, and on top of that an interest of 2.5%,” the official said.

Moneycontrol had reported in July 2024 that Centre was considering scaling back or discontinuing the SGB scheme due to high cost. The first tranche of SGBs, issued in November 2015, reached its final redemption in November 2023. For example, the Sovereign Gold Bond 2016-17 Series I was initially issued at Rs 3,119 per gram with an interest rate of 2.75% per annum. The redemption price of SGBs is calculated based on the average closing price of 999 purity gold, as published by the India Bullion and Jewellers Association Ltd (IBJA) for three business days preceding the redemption date.