Investors benefit from rising gold prices and currency depreciation. The purpose of the program was to free the Indians from their seemingly hiking appetite for physical gold.
India has always been one of the world’s top gold importers. Recently, the average foreign exchange loss caused by these imports has exceeded US$40 billion. This is eight times the average annual import of military hardware. Or, in terms of Rs, it is five times the annual budget allocation of the national rural employment guarantee scheme.
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Therefore, any dent in the Gold Import Act saves valuable foreign exchange, reduces India’s trade deficit and helps deepen our financial sector. SGB is part of the formal financial savings, unlike investing in physical metals only. The responsibility arising from these bonds is purely domestic currency, which poses a smaller risk to the monarch.
Since 2016, the government has sold a total of SGB, equivalent to about 150 tons of gold. Given that SGB distribution suffered indifference and neglect in the first few years, the possibility of this sale is much smaller than its potential. These bonds are not actively sold, just like gold loans put on by flashy brand ambassadors. Retail investors do not have the same easy investment as investing in mutual funds or stocks.
The situation has improved over the years. Eight years later, we may be at a turning point now, because awareness has spread, investing in applications gets better, and advice is easier and reliable. Even the Reserve Bank of India (RBI), its retail direct platform has an excellent app, including investments for SGB and government securities.
SGB is seen as a fierce competition with gold-medal exchange-traded funds (ETFs). It is at this critical moment that the government seems to be getting rid of the plan. In media interactions, India’s finance minister said the government is considering stopping the use of SGB scheme. That would be a big mistake.
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The reason is that the two initial goals of SGB have not been achieved. First, the physical import of gold has not yet declined substantially. Secondly, the government’s payment situation is too expensive. The center has cheaper options, with other forms of borrowing through bonds.
But SGB has never been introduced as a source of government deficit financing. Data shows that the total amount raised by all branches from the sale to the beginning of 2024 is approximately ₹80,000 million, but the elimination of redemption of these batches is expected ₹14 billion. Approximate calculations show that the compounding rate is about 7.5%. This is no much higher than the current borrowing costs of the Center.
More importantly, SGB investors are paying income tax on 2.5% interest income. This should be considered when calculating its net cost. In addition, SGB can save foreign exchange, and even if it is difficult to accurately estimate the savings of these shadows, these shadows cannot be ignored. The government has always tended to liability in its own currency, which is enabled by SGB.
However, the most important point is to reduce the cost of hedging when redeemed. The government seems to be staggering here. Gold ETFs must stock physical gold to resist fluctuations in gold prices and achieve redemption. However, the government can purchase the call option simultaneously by selling each batch of SGBS. This protects the price it will redeem in the bond.
Using the call option is like buying insurance for a small fee. For example, SGB pricing issued in March 2017 ₹2,943 per gram (or per unit). On expiration in March 2025, the redemption price is ₹8,634. This represents an annual return of 14.4% over eight years, which is higher than the cost of 7.5% or 8% of other bonds. However, this cost has risen sharply due to rising international gold prices, the rupee’s recent steep slide and the fact that the package is not completed. However, given that SGB sells “clicks” regularly, and proper hedging will reduce borrowing costs, the average of all batches is averaged. In addition, from now on, gold prices may stabilize or fall.
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SGB is an excellent investment opportunity for small depositors and helps deepen financial savings. They should be widely sold, although perhaps the hats per pot are metered. Every reform, whether it is the introduction of GST or the improvement of simplified investment in mutual fund system plans, takes time to take off. The SGB plan may be a takeoff point. SGB has insufficient benefits. This has led to gold sellers offering spot discounts when selling gold coins, which is unheard of on SGB days ago.
India’s import tariffs on gold have fallen from 15% to 6%. This also reduces the government’s SGB redemption cost, as spending depends on the falling price of the metal. Finally, SGB helps drive the gold economy from the dark shadows of illegal trade into the bright light of the formal financial sector. Don’t stop sovereign bonds. Just adjust them and optimize their costs by hedging.
The author is a senior researcher at the Pune International Centre.
