Sovereign Gold Bond Scheme Discontinued: Government Cites High Borrowing Costs
End of the Road for Sovereign Gold Bonds
The Indian government has decided to discontinue the Sovereign Gold Bond (SGB) scheme, citing that it has become an expensive way for the government to borrow funds. This decision was confirmed by Finance Minister Nirmala Sitharaman during a post-Budget media briefing.
The SGB scheme, launched in 2015, was designed to reduce physical gold imports by allowing retail investors to invest in paper gold. However, recent experiences have shown that the scheme has become a costly borrowing option for the government.
Why the Discontinuation?
According to Economic Affairs Secretary Ajay Seth, the decision to discontinue the SGB scheme was made to optimize how the government raises funds for financing the budget. The government has determined that the SGB scheme has become a high-cost method of borrowing.
Despite an allocation of ₹18,500 crore for SGBs in the FY25 Budget (a decrease from ₹26,852 crore in the interim budget), no new SGB tranches have been issued in the current fiscal year. The last issuance by the Reserve Bank of India (RBI) was in February 2023, amounting to ₹8,008 crore.
SGB Scheme Overview
The SGB scheme was introduced in November 2015, offering an alternative to investing in physical gold. The bonds had an eight-year maturity period, with an option for partial redemption after five years. The interest rate was initially set at 2.75% per annum, later reduced to a fixed 2.5% for the bond's entire tenure.
The scheme has seen a total issuance of ₹45,243 crore as of FY23, with an outstanding amount of ₹4.5 lakh crore by March 2023.
Returns and Redemption
A government official noted that investors have received returns of 9-11% per annum on SGBs, along with an additional interest of 2.5%. The redemption price of SGBs is determined by the average closing price of 999 purity gold, as published by the India Bullion and Jewellers Association Ltd (IBJA), for the three business days preceding the redemption date.
What This Means for Investors
The discontinuation of the SGB scheme marks a significant shift in how the government manages its borrowing strategy. While the scheme provided a popular way for investors to participate in the gold market, its high borrowing costs have led to its cessation. Investors will no longer be able to purchase new SGBs but will continue to hold previously issued bonds until maturity. This development encourages investors to seek alternative investment avenues for their gold holdings.
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