Government May Discontinue Sovereign Gold Bond Scheme Due to High Costs
Posted on: 18/Dec/2024 7:42:27 PM
The Government of India is reportedly considering discontinuing the Sovereign Gold Bond (SGB) scheme, citing the high cost of financing the fiscal deficit through this instrument.
Key Points About the Sovereign Gold Bond Scheme:
- What Are SGBs?
Issued by the Reserve Bank of India (RBI) on behalf of the government, SGBs represent gold in electronic form. Each unit equals one gram of gold, and investors earn 2.5% annual interest on the initial investment. - Advantages:
- Market price of gold is guaranteed at maturity.
- Periodic interest is credited semi-annually.
- Safer alternative to physical gold with lower storage costs.
- Redeemable after five years (with an eight-year maturity period).
- Redemption Value:
Based on the average closing price of gold (999 purity) of the previous three business days as per the India Bullion and Jewellers Association (IBJA).
Why Consider Discontinuation?
- High costs associated with financing the fiscal deficit.
- Misalignment between the scheme`s fiscal impact and its investor benefits.
- Reduction in the number of SGB tranches from 10 per year to just two in recent years.
Contextual Changes:
- Gold Import Duty Cut:
In July 2024, the customs duty on gold was slashed from 15% to 6%, boosting demand for physical gold. - Reduced Borrowing:
The government reduced net borrowing through SGBs for FY 2024-25 to ₹15,000 crore from ₹26,138 crore previously.
Performance Highlights:
- High Returns:
SGBs issued in 2016 saw a return of over 120% during their eight-year tenure, along with the 2.5% annual interest. - Premature Redemption Window:
The RBI has allowed early redemption for bonds issued between May 2017 and March 2020 during October 2024 to March 2025.
The final decision on the scheme`s future remains pending. Stay tuned for updates.
