In today’s Finshots, we tell you why the RBI and the government might be rethinking their approach to Sovereign Gold Bonds (SGBs) going forward.

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The Story

Indians have quite a few ways to invest in gold. The classic choice is buying physical gold like shiny coins, bars or jewellery. Then there’s digital gold. And then you’ve also got Gold ETFs (Exchange Traded Funds), which let you invest in gold without actually owning it. They just track gold prices and can be traded on the stock exchange like regular shares. And finally, there are Sovereign Gold Bonds (SGBs) — the protagonist of our story today and a safe, government-backed option.

But these SGBs might be heading toward the exit door because the government is getting a bit anxious about them and is even considering putting the brakes on issuing new ones.

Why, you ask?

Let’s break it down and take it from the top.

You see, back in 2015, the Reserve Bank of India (RBI) teamed up with the government to launch SGBs.

The idea was simple — curb India’s gold obsession by cutting down on gold imports and help control the growing current account deficit (the thing that happens when a country sends more money out of India than it brings in). And it was supposed to give the economy a little boost.

Here’s how it worked. Instead of buying physical gold, you’d buy a bond that’s tied to gold prices. On top of that, you’d earn a fixed interest (called a coupon) every year. Hold onto the bond for eight years, and any returns you made would be completely tax-exempt. Sounds pretty sweet, right?

These bonds also moved in sync with the price of gold, just like the gold jewellery you’d buy. And their issue price was based on the average closing price of the highest purity (999) gold for the last three business days before the subscription. This way, SGBs always reflected current market prices, making them a strong alternative to stashing gold in your locker.

Naturally, SGBs were a hit. Investors loved them because they could get exposure to gold without worrying about storage or security. Plus, they earned a steady 2.5% interest each year. And the fact that they were tax-exempt at maturity made SGBs a pretty solid investment vehicle.

The government was all smiles too. By issuing SGBs, it could borrow money at a lower interest rate compared to other government bonds. Investors accepted a lower return because SGBs were low-risk, backed by the government itself. And while this cheap borrowing helped fund government initiatives, for the first few years, it also helped cut down gold imports, which had been hurting the economy by widening the current account deficit.

So, with everyone on board, SGBs became the talk of the town. The government kept issuing new bonds while the price of gold kept going up. Between 2015 and August 2024, gold prices in India surged by a whopping 180%. This meant that investors weren’t just pocketing the annual interest but were also seeing the value of their SGBs skyrocket, thanks to rising gold prices.

But then came the catch.

SGBs are great when gold prices stay flat or rise slowly. But if gold prices shoot up, the government will have to pay out way more than it expected. And that’s exactly what happened.

Take the first tranche (batch) of SGBs from 2015, where the government raised ₹245 crores, for instance. At the time, gold was priced at ₹2,684 per gram. But by the time the bond matured, gold prices had climbed to ₹6,132 per gram. That’s a 128% increase! The RBI had to pay you the higher amount, plus the interest you earned along the way.

And while that may have been great news for you, it wasn’t so great for the government.

In fact, for that first batch of SGBs, the government ended up paying out 148% more than what it had raised, once you factor in both interest and the bond redemption value. Ouch!

To put this into perspective, you could compare SGBs to a regular government bond issued around the same time. Imagine a bond with a 7% interest rate and a 10-year maturity. If the government raised the same ₹245 crores with this bond as it did with SGBs, the traditional bond would result in a total payout of ₹416 crores.

But for SGBs? The total payout was a whopping ₹609 crores at maturity, thanks to the soaring price of gold. That’s a difference of about ₹193 crores, which is the extra cash the RBI had to cough up.

Another surprise was that the government and RBI thought they could tackle India’s love affair with gold by offering SGBs on a silver platter. They hoped to distract people from physical gold, but it didn’t quite work.

And it’s easy to see why. Indians don’t just buy gold for investment. They buy it as a symbol of value and prestige.

Sure, SGBs gained popularity during uncertain times, like the pandemic, as a safe bet. But let’s be honest, you can’t wear an SGB to a wedding like you can with gold jewellery, right? That emotional connection just wasn’t there.

So, what started as a clever way to curb gold imports and borrow money cheaply turned into a pretty expensive proposition for the government. And that might make you wonder, “Why did the government even launch SGBs if they were going to cost so much?”

Well, back in 2015, things looked very different. The government was battling a ballooning current account deficit, largely due to high gold imports. Plus, gold prices had been on a downward slide, falling by 15% between 2012 and 2015. The RBI saw SGBs as a way to solve these issues while offering Indians a safe and profitable investment.

The bet was that gold prices would stay stable or even drop further, letting the government raise money cheaply at a 2.5% interest rate—much lower than the 7% it paid on traditional bonds.

But no one could have predicted the surge in gold prices that followed. What started as a cost-effective plan turned into an expensive headache, with SGB values more than doubling in less than eight years. It’s safe to say that back in 2015, even then-Finance Minister Arun Jaitley couldn’t have imagined this scenario.

So, where does that leave the government now?

Out of the 67 tranches of SGBs issued, only four have matured so far. That means the government is staring down 63 more tranches that will mature over the next few years, with the last one set to expire in 2032. And if gold prices keep rising, thanks to global uncertainties, conflicts and central banks buying gold for its safety and liquidity, the government will have to dig deeper into its pockets to cover these SGB payouts.

But that doesn’t mean it’s the end of the road for SGBs because the government still has a couple of options. It could stop issuing new SGBs until gold prices calm down. Or it could tweak the bond structure — maybe change how the returns are taxed. But changes like these could make SGBs less attractive to investors, and that’s a tricky balance to strike.

For now, the RBI seems to be hitting pause. No new SGBs have been issued recently. In fact, the government is now aiming for a gross issuance of ₹18,500 crores of SGBs in FY25, which is a big drop from the ₹29,600 crores initially projected in the Interim Budget. We’ll have to wait until the upcoming September meeting to see if the government decides to continue the SGB program in its current form or make some changes.

But one thing is clear. The SGB scheme may have turned into a bigger challenge than the government originally planned. And if gold prices keep climbing, we won’t be surprised if we just see the end of Sovereign Gold Bonds altogether.

Until then…

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