Diwali is one of the most important holidays for Indian households, and Dhanteras is considered a lucky time to purchase gold or any other precious metal. This year, however, Dhanteras—observed on Tuesday—saw a muted demand for gold, while relatively affordable metals like silver stole the spotlight.
Due to West Asian tensions and worldwide uncertainties, gold prices have increased by nearly 30% (to Rs 78,430 per 10 grammes) since Diwali, which has caused consumers to look for alternative investment options in order to reach their financial objectives. Besides the stock market and conventional savings tools like Fixed Deposits, sovereign gold bonds (SGBs) – introduced by the Reserve Bank of India – were also gaining momentum among Indian investors.
It is unlikely that the Centre will issue any more SGB trances, though, as they are viewed as “complex and expensive instruments.”
Sovereign gold bonds are what?
Sovereign gold bonds are government securities valued in grammes of gold that can be held in place of actual gold assets. Purchasing SGBs entails buying a bond that is locked in for eight years and represents a certain amount of gold. This eliminates the need for physical storage and enables the asset to appreciate over time. In this instance, an early redemption option for the bonds after five years was also offered by the RBI.
How do SGB returns get calculated?
On its website, the RBI explained: “Minimum investment in the bond shall be one gramme with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family and 20 kg for trusts and similar entities notified by the government from time to time per financial year (April–MMarch).
These bonds offer a fixed interest rate of 2.50 percent per annum based on the initial investment amount, credited to the investor’s bank account semi-annually. The simple average closing price of 999 purity gold for the week before the bond’s maturity date is used to calculate the bond’s redemption price.
Why were SGBs introduced by the Centre?
The RBI has only issued one SGB in 2024 thus far. Premature redemption of SGBs issued between May 2017 and March 2020 was also announced by the central bank in August, suggesting that no new SGBs will probably be issued anytime soon.
These bonds were introduced with two key objectives:
1. Since India is the world’s second-largest importer of physical gold after China, there should be less demand for it.
2. Permit the Centre to take out loans with reduced interest rates.
Why has the Centre put a hold on issuing SGBs?
However, the decision to halt the issuance of SGBs was probably made because they were becoming expensive for the Centre, given the strain on government finances caused by rising gold prices and currency fluctuations. To put things in perspective, gold is valued in US dollars. Gold costs more dollars to purchase when the value of the dollar declines relative to the domestic currency.