Why sovereign gold bonds are glittering away
₹5,923 per unit aggregating ₹6,914 crore. This is significantly higher than the 7.7 trillion units subscribed in the June tranche and the highest subscription since the government began issuing SGBs back in November 2015. The quantum of subscription has been rising consistently and so far, SGBs have cumulatively raised ₹56,342 crore.
In volume terms this equals 122.07 tonnes of gold (each unit equals a gram of gold). The total outstanding units after redemption (investors are allowed to redeem the bonds after 5 years) equals 120.63 tonnes. What explains the rising interest in SGBs? The macro-economic conditions in the country remain uncertain.
Oil prices have begun to rise again, and this will put pressure on the rupee. A weaker rupee would cause domestic gold prices to increase further. Also, SGBs have worked well as a hassle-free investment option without the need to hold physical gold.
They offer an interest rate of 2.5% per annum and the investment is exempt from capital gains if it is retained for the full term of eight years. The bond value has increased handsomely. The first tranche was priced at ₹2,684 per unit while the latest was at ₹5,923 per unit.
Does that explain the low redemptions? Yes. The scheme allows bonds issued up to May 2018 to be prematurely redeemed. Only units aggregating 1.44 tonnes have been redeemed out of the eligible 23.47 tonnes so far—a redemption ratio of little over 6%.
This clearly means that investors see SGBs as an attractive investment option. The government’s plan to reduce gold imports appears to be working well. Is gold still a hedge against inflation? Not really.
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