Clipped from: https://www.thehindubusinessline.com/opinion/editorial/golden-lessons/article70569835.ece
Sovereign gold bonds offer some policy lessons
The skyrocketing gold prices have added to the government’s fiscal stress | Photo Credit: brightstars
As gold prices head for the stratosphere, this is turning up the heat on an unexpected entity, the Government of India. As rising global prices and a depreciating rupee propel bullion prices to over ₹16,000 per gram, the Government is having to sharply hike its budgetary allocation to redeem maturing Sovereign Gold Bonds (SGBs). A report in this newspaper estimates that in the upcoming Budget, the ₹700 crore outlay earmarked for the Gold Reserve Fund may need to be revised significantly higher.
FY25 outlays for these bonds turned out to be over three times the budgeted number. This may be a recurring issue for the government as long as gold prices remain elevated. The government issued 67 tranches of SGBs between FY16 and FY24. The FY18 and FY19 tranches coming up for redemption now, were issued at a face value of between ₹2,800 and ₹3,300 per gram, while current market prices hover at over ₹16,000 per gram. While the government has been getting a lot of flak for this miscalculation, the criticism is unfair. When they were first introduced in 2015, SGBs were seen as a policy instrument to allow Indian households to park their savings in their favourite asset, without adding to the country’s import bill or skewing its current account balance. At that time, gold had delivered a mere 5 per cent return in the previous five years and ruled at ₹2,600 per gram. Initial SGB issues in fact met with tepid response, despite the government sweetening the offer with an annual interest and a capital gains tax exemption. At the time, hardly any market participants anticipated that gold would soar to such astronomical heights. It must also be recognised that while the SGBs have proved a very expensive form of borrowings for the government, they have delivered stellar returns to retail investors who bought them. This is not such a misfortune. Even after recent gold price gains, SGBs account for less than ₹2 lakh crore of outstanding government borrowings, which is quite manageable for the fisc.
Having said this, there are useful policy lessons to be drawn from the SGB experience. One, whenever the government decides to rely on non-Rupee denominated borrowings, it would be prudent to hedge against price risks. In this case, buying physical gold to match outstanding SGBs would have been self-defeating, but hedging against adverse price movements in the currency or commodity derivative markets could have been explored. Two, the government probably went overboard in offering complete capital gains tax exemption on SGB proceeds, at a time when other forms of bullion investments were taxed.
Finally, when issuing market-linked instruments, regular investments that smooth out price risks are better than lumpsum investments that are highly influenced by point-to-point price movements. This holds good both for the buyer and seller. Any future gold deposit scheme to woo retail savers should learn from mutual funds’ Systematic Investment Plans.
Published on January 30, 2026
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