MC Exclusive: End of sovereign gold bonds?

A source in know told Moneycontrol that SGBs have been an expensive proposition for the government and the government is unlikely to pursue them.

The government may scale back or even discontinue the Sovereign Gold Bonds (SGB) scheme, which it considers too expensive, a person familiar with the development said.

This move coincides with the Union budget cutting customs duties on gold and silver to 6 percent from 15 percent. The reduction in customs duty is expected to dampen demand for Sovereign Gold Bonds (SGB). Following the tax cut, SGB prices on the National Stock Exchange fell by 2-5 percent.

The first tranche of SGBs, issued on November 30, 2015, reached its final redemption in November 2023. Investors who participated in the SGB scheme 2016-17 -series 1, issued in August 2016, are nearing their final redemption, which is set for the first week of August 2024. The original issue price of Sovereign Gold Bond 2016-17 -Series I was Rs 3,119 with an annual interest rate of 2.75 per cent. The redemption price of SGBs is calculated using the average closing price of 999 purity gold as published by the India Bullion and Jewellers Association Ltd for three business days preceding the redemption date. Investors pay an issue price and the bonds get redeemed on maturity. “We have given 9-11 per cent return per annum and on top of that an interest of 2.5%,” said a senior government official.

The current interest rate for the Sovereign Gold Bond Scheme is 2.5% per annum, the interest rate is fixed for the entire tenure of the bond, which is eight years. The gold bond interest is credited to the investor’s account every six months.

“You get around 10-11 per cent return with mutual funds at a risk; with SBG, there is no risk. The scheme was too attractive ... there is no economic rationale,” said the source.

There hasn’t been an issue of Sovereign Gold Bonds since February this year. Import duties on gold have been consistently raised from 2 per cent in 2012, to 4 per cent in the Budget 2012-13. In 2013, the government increased the import duty on gold jewellery to 15 per cent from 10 per cent. The government cited several reasons for the hike in customs duty including a move to bring down smuggling of gold and to reign in the rising currant account deficit.

“The government had to roll it back.. gold is an important employment generating sector. It is a sector which contributes to our exports,” said a source.