Sovereign Gold Bonds (SGBs) have become a popular investment avenue, offering the allure of gold without the need for physical ownership. However, various economic factors may compel the government to reconsider or pause the issuance of SGBs. This year, we have seen a delay in issuing SGBs, as it is already August and there is no news of a new tranche, which is typically released between April and June each year. This delay is raising questions and concerns.
Here are three primary reasons for the delay:
No Underlying Gold in SGBs
Unlike other paper forms of gold like ETFs and Gold Savings Plans, SGBs are not backed by physical gold. These are bonds issued by the Reserve Bank of India on behalf of the Government of India, making them different from conventional gold reserves.
Currently, the Reserve Bank of India (RBI) has raised funds equivalent to 139 tonnes of gold through SGBs, which is alarming when compared to the 822 tonnes of gold reserves held by the Central Bank. SGBs now account for 17% of India’s gold reserves—a significant portion without physical backing. This scenario heightens financial vulnerabilities, making a slowdown in SGB issuances a prudent measure.
Rising Gold Prices
Gold prices have surged dramatically. In 2019, the price stood at around ₹35,000 per 10 grams, almost doubling by 2024 to around ₹75,000 per 10 grams. Such steep increases have escalated the government’s liability on SGBs issued during periods of lower prices.
In FY 2024, gold provided a 15% return; so far this fiscal year, it has already delivered a 13% return. The ongoing rise in gold prices increases the financial risk associated with continuing SGB issuances.
Exchequer Liability
Examining the initial tranche of SGBs reveals a potential cost burden. The government raised ₹245 crore, with investors receiving gold at ₹2,684 per gram. It was redeemed at ₹6,132 per gram, representing approximately a 120% increase. After including the fixed 2.5% annual interest rate, the total governmental cost has risen to around ₹610 crore, a 148% increase.
With 67 tranches released so far and only 4 redeemed, higher gold prices have substantially amplified the fiscal burden. Raising the same amount of funds through traditional bonds at a 7% interest rate would have resulted in a considerably lower cost—around ₹400 crore if gold prices remained stable. The stark difference in costs underscores the amplified financial burden the government bears due to rising gold prices under the SGB scheme.
Given these compelling reasons, a pause or slowdown in the issuance of SGBs would be a pragmatic move to mitigate financial risks and ensure economic stability.