A decision regarding the issuance of Sovereign Gold Bonds during the current fiscal will be taken next month when the Finance Ministry and the Reserve Bank of India (RBI) will meet to discuss borrowing for the next six months, a senior Government official said on Thursday. Meanwhile, there are no plans as of now to halt the issuance of Sovereign Green Bonds.
Sovereign Gold Bond (SGB) and Sovereign Green Bond (SGrB) are two instruments for government borrowing apart from popular Long Term Dated Securities.
Costly tools
“SGB has been one of the most expensive tools to bridge the fiscal deficit,” he said. This is one of the key reasons that a number of issues are coming down. In FY21, there were 12 issuances which came down to 4 in FY24. However, there is not a single issue this fiscal as of now. “This is not a social security scheme. Any decision of fresh issuance will be based on the assumption that it should not just benefit the customer but the government too,” he said.
In this context, there are reports that the Central Government might consider issuing a lower quantum of SGBs for FY25. Reports indicate the government plans to float ₹18,500 crore worth of SGBs in FY25, compared to ₹29,638 crore estimated in the Interim Budget 2024.
The aggregate sum raised during 2023-24 amounted to ₹27,031 crore (44.34 tonnes). Since the inception of the SGB scheme in November 2015, a total of ₹72,274 crore (146.96 tonnes) has been raised through 67 tranches.
Duty Reduction
The SGB is in question as the government has lowered the import duty on gold to 6 per cent from 15 per cent, making physical gold purchases more attractive than investments in SGB. At the same time, the second-year issuance of SGB is nearing redemption, and the expectation is that the government will have to bear higher outgo as gold prices have almost doubled in the last 8 years.
To bring down the physical import of gold and the consequent reduction in the current account deficit, the SGB was introduced. Known as paper gold or e-gold, this bond is denominated in multiples of gram(s) of gold with a basic unit of 1 gram. The tenor of the Bond is 8 years with an exit option in 5th, 6th and 7th year, to be exercised on the interest payment dates. While the minimum permissible investment is 1 gram, the maximum is 4 kg. The investor receives an interest of 2.50 per cent per annum payable semi-annually on the nominal value.
While the interest on Gold Bonds shall be taxable, capital gains tax on the redemption of SGBs for individuals has been exempted. The redemption price will be in Indian Rupees based on the simple average of the closing price of gold of 999 purity of the previous 3 working days published by IBJA.
Sovereign Green Bond
Meanwhile, the official said that India will not stop issuing green bonds, but “it could cancel specific issuances if the cost of borrowing is high.” While the expectation is that the target through SGrB is at around ₹25,000 crore, ₹12,000 crore will be raised through an auction on August 2.