How sovereign gold bonds stopped glittering for the government
₹3,119 per gram then, according to the India Bullion and Jewellers Association Ltd. That gold was redeemed this year at ₹7,190 per gram. In effect, the government will pay 13.5-14% compounded on the SGBs redeemed this year, given around 11% CAGR of gold prices plus the interest.
The price appreciation is amplified by the rupee's fall from ₹71 per US dollar to ₹84 during that period. Gold, meanwhile, appreciated by around 9.5% in the last eight years. T-Bills and gilts offer interest rates, around half the total cost of SGBs.
Also Read: Gold bondholders winners even after slash in duty This makes SGB a great instrument for investors and a very expensive proposition for the government since this is a zero-sum game and the investor gains equal the government's costs. Moreover, to attract investors, the capital gains tax on SBG had been exempted (the interest income is taxed). So, the investor receives interest on the bond (unlike with physical gold) and tax-exempt price appreciation without any of the hassles of storage or worries about purity.
The government has now woken up to this situation. The Union budget in July targeted a gross issuance of ₹18,500 crore of SGBs in FY25, much lower than ₹29,638 crore assumed in the interim budget in February. Net government borrowing via SGBs (after redemptions of earlier issues) was slashed to ₹15,000 crore from ₹26,138 crore as estimated in February.
In FY24, the gross and net borrowings via SGBs were ₹26,852 crore and ₹25,352 crore respectively. The Budget also reduced import duties to 6% from 15% which lowers input costs for jewellers, compresses margins for smugglers and immediately reduces the price of gold in rupee terms. Also Read: When gold prices spiked, investors saw their
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