The sharp rise in gold prices – over 35% in this financial year – has seen the government’s outstanding debt on sovereign gold bonds (SGBs) spiralling to a record Rs 1.5 lakh crore.
The current total SGB outstanding is 126 tonnes. And at current prices, the per tonne price of gold is Rs 1,241 crore per tonne. The simple average of issue prices of the last 58 issues (that have not completed 8 years for redemption) is Rs 4,227 per gram. Since the government is paying 2.5% interest (on the purchase year’s price) on this gold every year, at current prices of gold, the government’s debt has increased by approximately 200%.
Shekhar Bhandari, President, Kotak Mahindra Bank, said that, “The Indian government faces significant liability due to SGBs, primarily because of the rising gold prices. This liability has increased by 930% since 2017-18, when it was ₹6,664 crore.”
Despite the sharp rise in prices, there has been little premature redemption, according to the latest data on outstanding SGB liability of the government, as provided by the Reserve Bank of India (RBI).
The government discontinued SGBs from the financial year 2024-25. The last SGB tranche was issued in February 2024 at the gold price of Rs 6,263 per gram. From that level as well, prices have nearly doubled (over Rs 12,000).
Bhandari added, “SGBs can be both a liability and an asset, depending on the perspective.” The government has been able to limit the import of 150 odd tonnes of gold (which is the total of all bonds sold by the RBI since its launch.
Experts say that SGB has helped reduce imports of gold to that extent and reduced pressure on the rupee exchange rates.
Interestingly, while the government might have reduced the imports of gold from retail investors, the RBI has bought more than enough gold to match this liability. The RBI adding gold to foreign exchange reserves is an indirect hedge.
SGBs are considered a safe and attractive investment option for individuals, Hindu Undivided Families (HUFs), trusts, and universities.
Outstanding gold ETFs $10 bn
Gold exchange-traded funds (ETFs), or paper gold, have seen a sharp rise in demand with the rising prices. Even though the size of ETFs outstanding is smaller than SGBs. Rising demand has led to India’s total gold ETF outstanding of 77.3 tonnes as per the World Gold Council’s latest Exchange Traded Funds report. The value of this at the end of last month is $10 billion, says the data.
Chirag Mehta, CIO, Quantum AMC said, “Gold and silver have become the best asset class surpassing all others this year. This has increased investors’ interest significantly in both precious metals. We see the share of gold in the portfolio increasing from 5 towards 10-15%. With more investors starting to add it to their portfolio, this will lead to diversification and investments will continue going ahead.” Gold ETFs assets are rising also because of SIPs which is a continuous flow at all price levels.