Yearly, the Reserve Financial institution of India (RBI) usually releases Sequence I of Sovereign Gold Bonds (SGBs) between April and June. Nonetheless, as we sit in August, there’s nonetheless no information of the discharge for 2024.
This delay is elevating questions and issues. Traditionally, the RBI issued 10-14 tranches of SGBs yearly. But, over the past two years, solely 4 collection had been launched, suggesting a transparent and deliberate slowdown.
Apparently, regardless of this slowdown, the final fiscal 12 months noticed vital subscriptions of 443 lakh models, in comparison with 122 lakh models in FY23, 270 lakh models in FY22, and 323 lakh models in FY21.
So, what’s driving the slowdown within the launch of the following tranche of SGBs? SGBs had been launched in 2015 with a selected objective: to curb the rising present account deficit by lowering gold imports. The concept was to offer an alternative choice to bodily gold purchases by providing digital gold with a hard and fast 2.5% rate of interest.
This initiative was based mostly on the idea that gold costs would stay comparatively steady. Between 2012 and 2018, gold costs remained comparatively stagnant, fluctuating inside a slender vary. Throughout this era, the federal government noticed a possibility. By providing SGBs at a 2.5% rate of interest, the federal government may elevate funds at a decrease value in comparison with issuing authorities bonds, which generally carry a 7% rate of interest.
The plan was financially sound so long as gold costs remained inside a modest vary. Nonetheless, the absence of bodily gold backing for SGBs considerably altered the monetary calculations.
The onset of the COVID-19 pandemic in 2020 and subsequent geopolitical tensions led to unprecedented adjustments within the international financial system, and gold was no exception. Gold, typically seen as a safe-haven asset throughout instances of financial uncertainty, noticed its value surge dramatically.
In 2019, gold costs had been round Rs35,000 per 10 grams. By 2024, the worth had practically doubled to almost Rs75,000 per 10 grams. This steep rise in gold costs has considerably elevated the federal government’s legal responsibility on the SGBs issued throughout the interval of decrease costs.
The preliminary technique was based mostly on the premise that the federal government may supply a low-interest product with restricted publicity to gold value volatility. Nonetheless, with gold costs skyrocketing, the monetary burden on the federal government has grown significantly. Every SGB issued now represents a a lot bigger monetary dedication than initially anticipated. The two.5% curiosity that appeared engaging in a steady gold value setting now seems much less so when juxtaposed with the federal government’s rising liabilities.
This dramatic shift within the gold market has pressured the federal government to rethink the viability of constant to situation SGBs on the identical tempo. The price of managing these bonds, coupled with escalating gold costs, could have made this system much less interesting.
How a lot has the rise in gold costs value the exchequer? Let’s study the primary tranche of Sovereign Gold Bonds. The federal government raised Rs 245 crore, with traders subscribing to 49 lakh models of gold at a problem value of round Rs2,684 per gram. Immediately, with the redemption value hovering to Rs6,132, this represents an approximate 120% improve. After accounting for the fastened 2.5% annual rate of interest, the full value to the federal government swells to round Rs 610 crore (Rs560 crore + Rs49 crore in curiosity)—an total improve of about 148%. The RBI has launched a complete of 67 tranches up to now. The final tranche was launched on February 21, 2024, gathering round Rs 8,000 crore.
As compared, if the federal government had raised the identical quantity by means of conventional bonds at a 7% rate of interest, with gold costs remaining steady, the full value would have been round Rs400 crore. This stark distinction underscores how rising gold costs have considerably amplified the federal government’s monetary burden beneath the SGB scheme.
With U.S. rates of interest prone to lower and ongoing geopolitical tensions anticipated to push gold costs even larger, the federal government may have to think about pausing the discharge of recent SGB tranches to keep away from additional escalating prices.
