The Finance Ministry and the Reserve Bank of India (RBI) are set to make a decision on the future of Sovereign Gold Bonds (SGB) during the week starting 23 September, with the potential for a fresh issuance in the current fiscal year. The meeting will also determine the government’s market borrowing plan for the second half of the fiscal year, starting 1 October.
The most recent tranche of SGBs (FY 2023-24 Series IV) was issued on 21 February. During the 2023-24 fiscal year, the government raised ₹27,031 crore (44.34 tonnes) through the programme. Since the SGB scheme’s inception in November 2015, a total of ₹72,274 crore (146.96 tonnes) has been raised across 67 tranches.
Decline in SGB Issues
Officials have indicated that SGBs have become an expensive tool for bridging the fiscal deficit, contributing to a decline in the number of issuances. In FY21, there were 12 issuances, but this dropped to four in FY24. No issuances have taken place in the current fiscal year so far.
“This is not a social security scheme. Any decision on fresh issuance will be based on the assumption that it should not just benefit the customer, but the government too,” an official said, speaking on condition of anonymity.
The scrutiny of the SGB programme intensified after the government reduced the import duty on gold from 15% to 6%, making physical gold purchases more attractive than investments in SGBs. The second-year issuance of SGBs is also nearing redemption, with expectations that the government will face higher payouts due to a significant rise in gold prices over the past eight years.
The RBI has already announced that 30 tranches, issued between May 2017 and March 2020, will be eligible for premature redemption between 1 October and 31 March 2024.
Introduced to curb physical gold imports and reduce the current account deficit, SGBs, often referred to as "paper gold" or "e-gold," are denominated in multiples of grams, with a basic unit of 1 gram. The bonds have a tenor of eight years, with exit options available in the 5th, 6th, and 7th years, exercisable on interest payment dates.
The minimum investment allowed is 1 gram, while the maximum is capped at 4 kg. Investors receive an interest of 2.50% per annum, payable semi-annually on the nominal value.
Although interest on SGBs is taxable, capital gains tax on redemption for individuals is exempt. Redemption is made in Indian rupees, based on the simple average of the closing gold price (999 purity) from the previous three working days, as published by the Indian Bullion and Jewellers Association (IBJA).
Market Borrowing
The meeting between the Finance Ministry and RBI is also expected to discuss lower borrowing for the second half of the fiscal year. Originally, the interim budget set a borrowing target of ₹14.13 lakh crore, which was later revised to ₹14.01 lakh crore.
Borrowing for the first half of the fiscal year was pegged at ₹7.50 lakh crore, leaving a potential ₹6.51 lakh crore for the second half. However, final borrowing figures may be lower, as tax collections have been strong and expenditure remains low.
The outcome of the meeting is expected by the end of September.
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