SGBs turn costly affair for govt, fail to curb imports
Mumbai, August 15, 2024
Sovereign gold bonds double investors wealth, earn regular income
The fund-raise through sovereign gold bonds (SGB) has turned out to be a costly proposition for the government as the gold prices have more than doubled compared to the issue price.
Besides the run-up in gold prices, the government has also paid an interest of 2.5 per cent per annum and foregone long-term capital gain tax as redemptions after 8-year tenure are tax-free in the hands of investors.
The two SGBs that will mature in September and November were issued at ₹3,007 and ₹3,150 per gram and RBI will fix the redemption price based on average gold price on last three-day before the maturity.
The aggregate sum raised during 2023-24 amounted to ₹27,031 crore (44.34 tonnes). Since the inception of the SGB scheme in November 2015, a total of ₹72,274 crore (146.96 tonnes) has been raised through 67 tranches
Govt to decide on Sovereign Gold Bond issuance for next fiscal
SGBs are government securities denominated in grams of gold and serve as a substitute for holding physical gold. The bonds are issued in denominations of one gram of gold and in multiples thereof.
Minimum investment in SGB is one gram with a maximum limit of 4 kg for individuals and 20 kg for trusts and similar entities notified by the government per financial year.
Surging gold imports
The financial strain apart, SGBs have also not served the purpose for which it was launched. The government intended to bring down gold imports by diverting physical gold demand to demat form with the launch of series of SGBs.
Interestingly, investors viewed SGB as an attractive investment opportunity with sovereign guarantee. Though liquidity remains a concern, all the SGB series are listed and traded in the cash segment of the BSE and NSE.
Despite the run-away success of SGBs, gold imports continue to surge unabated. Gold imports in the first half of this year increased 16 per cent to 376 tonnes against 325 tonnes, according to the World Gold Council report.
Incidentally, even after the recent fall in gold prices due to import duty cut in the Budget, RBI had to fix a pre-mature redemption price of ₹7,000 per gram for the SGBs that completed 5-year tenure on August 14. These bonds were issued at ₹3,499 in August 2019.
Aamir Makda, Commodity & Currency Analyst, Choice Broking, said if the government releases new SGBs soon, they are expected to be more popular due to the recent price drop after the cut in customs duty.
Investors with long-term bullish view on gold can explore buying SGBs on stock exchanges but it hinges on comparing the bond’s current market price to its eventual redemption value, he added.
As per RBI data on the four bonds that have matured so far suggests SGBs have more than doubled investors returns over its 8-year tenure. The last SGB was announced in February at ₹6,263 per gram and gold prices closed at ₹7,093 as of Wednesday.
On behalf of the government, the Reserve Bank has so far issued 67 tranches of SGBs since the first issue on November 30, 2015. The outstanding units of SGBs are worth about ₹96,120 crore.
[The Hindu Business Line]
