Every year, the Reserve Bank of India (RBI) typically releases Series I of Sovereign Gold Bonds (SGBs) between April and June. However, as we sit in August, there’s still no news of the release for 2024.
This delay is raising questions and concerns. Historically, the RBI issued 10-14 tranches of SGBs annually. Yet, over the last two years, only four series were released, suggesting a clear and deliberate slowdown.
Interestingly, despite this slowdown, the last fiscal year saw significant subscriptions of 443 lakh units, compared to 122 lakh units in FY23, 270 lakh units in FY22, and 323 lakh units in FY21.
So, what’s driving the slowdown in the release of the next tranche of SGBs? SGBs were introduced in 2015 with a specific purpose: to curb the growing current account deficit by reducing gold imports. The idea was to provide an alternative to physical gold purchases by offering digital gold with a fixed 2.5% interest rate.
This initiative was based on the assumption that gold prices would remain relatively stable. Between 2012 and 2018, gold prices remained relatively stagnant, fluctuating within a narrow range. During this period, the government saw an opportunity. By offering SGBs at a 2.5% interest rate, the government could raise funds at a lower cost compared to issuing government bonds, which typically carry a 7% interest rate.
The plan was financially sound as long as gold prices remained within a modest range. However, the absence of physical gold backing for SGBs significantly altered the financial calculations.
The onset of the COVID-19 pandemic in 2020 and subsequent geopolitical tensions brought about unprecedented changes in the global economy, and gold was no exception. Gold, often seen as a safe-haven asset during times of economic uncertainty, saw its price surge dramatically.
In 2019, gold prices were around Rs35,000 per 10 grams. By 2024, the price had nearly doubled to nearly Rs75,000 per 10 grams. This steep rise in gold prices has significantly increased the government’s liability on the SGBs issued during the period of lower prices.
The initial strategy was based on the premise that the government could offer a low-interest product with limited exposure to gold price volatility. However, with gold prices skyrocketing, the financial burden on the government has grown considerably. Each SGB issued now represents a much larger financial commitment than originally anticipated. The 2.5% interest that seemed attractive in a stable gold price environment now appears less so when juxtaposed with the government’s growing liabilities.
This dramatic shift in the gold market has forced the government to reconsider the viability of continuing to issue SGBs at the same pace. The cost of managing these bonds, coupled with escalating gold prices, may have made the program less appealing.
How much has the rise in gold prices cost the exchequer? Let’s examine the first tranche of Sovereign Gold Bonds. The government raised Rs 245 crore, with investors subscribing to 49 lakh units of gold at an issue price of around Rs2,684 per gram. Today, with the redemption price soaring to Rs6,132, this represents an approximate 120% increase. After accounting for the fixed 2.5% annual interest rate, the total cost to the government swells to around Rs 610 crore (Rs560 crore + Rs49 crore in interest)—an overall increase of about 148%. The RBI has released a total of 67 tranches so far. The last tranche was released on February 21, 2024, collecting around Rs 8,000 crore.
In comparison, if the government had raised the same amount through traditional bonds at a 7% interest rate, with gold prices remaining stable, the total cost would have been around Rs400 crore. This stark difference underscores how rising gold prices have significantly amplified the government’s financial burden under the SGB scheme.
With U.S. interest rates likely to decrease and ongoing geopolitical tensions expected to push gold prices even higher, the government may need to consider pausing the release of new SGB tranches to avoid further escalating costs.