Just two months into the launch of the Sovereign Gold Bond (SGBs) scheme in January 2016, former finance minister late Arun Jaitley had asked bank chiefs to promote SGBs among customers during the second tranche. Reason: The first tranche’s sales had not even crossed one tonne. Seven years later, the Reserve Bank of India (RBI) under Governor Shaktikanta Das (who, incidentally, was present in the earlier meeting as secretary, Department of Economic Affairs) has brought down the number of tranches from a whopping 12 and 10 in FY21 and FY22, to just four in FY23. This time around, the reason might be slightly different: SGBs don’t seem to matter much for physical gold enthusiasts.
While there might be other reasons for the latest RBI decision, what is clear is that these bonds haven’t been able to fulfil their two main objectives—to reduce the demand for physical gold and shift a part of the gold imported every year for investment purposes into financial savings through gold bonds. At best, the impact can be called marginal as the maximum tonnage of gold raised through this route was 32 tonnes in FY21. As a result, gold continues to be among the highest contributors to the current account deficit, which is close to a decadal high of 4.4%. But it certainly wasn’t due to a lack of effort from the government. To promote SGBs, the government not only advertised heavily, but also incentivised investors by giving a fixed annualised rate of 2.5% extra fee on the initial amount.
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The impact has been negligible. In the first year of the SGB launch, there was some slowdown in imports, but in most of the other years, except FY20, the needle didn’t move much. In most years, it has stayed close to 700-900 tonnes, similar to the trend in the previous years. Meanwhile, gold prices have been on the boil, too. Since 2016, gold prices (MCX) are up 127% at a compounded annual growth rate of 18.4%. Going ahead, with global uncertainty and a recession on the cards, gold may continue to be in demand. What is interesting is that while SGBs can be redeemed after five years, reports suggest that till now only one tonne has been redeemed. So, investors in the bonds aren’t really trying to take advantage of the sharp price rise in the yellow metal.
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The problem, therefore, for the government is two-pronged. One, it is sitting on almost 100 tonnes of gold worth Rs 57,000 crore (at current prices) that has to be annually serviced, in terms of interest payment twice a year. Also, when the bonds mature from November onwards, it will have to possibly pay a much higher price to investors. In terms of the total borrowing cost of SGBs, the government is paying over 20% (18.4% capital gains CAGR +2.5% interest) for these bonds—much more than all other forms of government borrowing. Worse still, these bonds haven’t been able to replace physical gold and the current account deficit continues to bleed due to it. It was a brave attempt, but weaning away Indians from physical gold has proved to be impossible. The government needs to think harder and promote schemes like gold monetisation scheme more aggressively to encourage people to lend physical gold and reduce imports, or simply reduce or stop this scheme.