The government appears reluctant to issue new sovereign gold bonds (SGBs) due to rising costs and increasing gold prices. However, according to sources, a final decision on issuing fresh SGBs will be made after evaluating market conditions.
New Gold Bonds Tailored To Market Fluctuations
Officials have indicated that new SGBs will be issued depending on market needs and assessments. Although Finance Minister Nirmala Sitharaman set a target of issuing Rs 18,500 crore (Rs 185 billion) worth of SGBs in the Union Budget, experts suggest the government may be hesitant to proceed with fresh bonds at present.
The timing of SGB Issuance could be more specific.
The government had earlier suggested that a decision on continuing the SGB scheme would be made in September, alongside discussions about the Reserve Bank of India’s borrowing calendar. While the finance ministry announced plans to borrow Rs 6.61 trillion from the market through 21 weekly auctions in the second half of the financial year, SGB issuance was not mentioned. It’s worth noting that SGB issuances are typically outside the government’s borrowing schedule.
SGBs as a Substitute for Physical Gold
Sovereign Gold Bonds (SGBs) are government securities denominated in grams of gold and serve as a substitute for physical gold. Investors purchase SGBs with cash, and the bonds are redeemed in cash at maturity. These bonds were introduced to reduce physical gold demand and shift domestic savings towards financial assets.
Rising Costs and Limited Economic Sense
Madan Sabnavis, chief economist at Bank of Baroda, explained that not issuing new SGBs may be temporary. He noted that issuing these bonds in the current market needs to make economic sense due to rising gold prices and overall costs. Additionally, Sabnavis pointed out that despite the introduction of SGBs, physical gold imports haven’t decreased as much as expected.
No Urgent Need for SGB Issuance
Vivek Kumar, economist at Quantico Research, highlighted that India’s current account deficit is under control, reducing the necessity of continuing to issue gold bonds. He also emphasized that the steep rise in international gold prices over the last six years has made gold bonds one of the most expensive ways for the government to fund its fiscal deficit. Kumar believes this may explain why the government has quietly abandoned the scheme for this financial year.
Potential for Future Consideration
Despite the pause in issuing SGBs, Kumar suggested that the government consider reintroducing the scheme at a more favourable time. For now, the focus appears to be on evaluating when the economic conditions would make it more viable to reissue SGBs.
History and Objective of SGBs
The government launched the Sovereign Gold Bond scheme in November 2015 to reduce physical gold demand and encourage financial savings. The scheme was designed to offer SGBs in periodic tranches, allowing investors limited time windows to participate.
Conclusion
While the government evaluates the current economic landscape, the future of new SGB issuances remains uncertain. Rising costs and limited demand for gold bonds may have led to a temporary halt, but market conditions could dictate the scheme’s reintroduction at a more appropriate time.
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