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Sovereign Gold Bonds

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Sovereign Gold Bonds (SGBs) are a kind of Government bonds that are issued (by the RBI on behalf of the Government) on payment of rupees but denominated in grams of gold. The value of these bonds is tied to the value of gold. On redemption, the investor gets interest income and the prevailing price of gold.

These bonds are thus, different from usual Government securities (G-secs) as the redemption value at the time of maturity is not a fixed sum, but linked to the price of an underlying commodity called gold.

For example, if an investor invests in a 10 gram SGB, at the price of say Rs 2,500 per gram, then he is entitled to an yearly interest income at a certain ‘x’ percentage, plus on maturity, he will get the then prevailing price of gold (which may not necessarily be Rs 2,500 per gram).

Like G-secs, SGBs are also backed by a sovereign guarantee.

The introduction of the Sovereign Gold Bonds was announced in the Union Budget 2015-16. Accordingly, the detailed guidelines of the scheme were notified by the Government on 30 October, 2015[1] and the scheme was formally launched by the Hon’ble Prime Minister of India along with the other two gold schemes – Gold Coin & Gold Monetization Scheme - on 5 November 2015. The first tranche of issuance of the SGBs was accordingly opened from 5 November 2015 to 20 November 2015. Bombay Stock Exchange and the National Stock Exchange started trading in sovereign gold bonds from June 2016 onwards, very much similar to the way a share is traded.

Gold Monetization Scheme focuses on those individuals who have gold available with them and intend to encash it for realizing its monetary value. On the other hand, sovereign gold bonds scheme targets those individuals who intend to purchase gold, for investment purpose.


Advantages and disadvantages
To the investor
The advantages to the investor in investing in SGB instead of gold are the following:

The only possible disadvantage to the investor is that, while in the event of appreciation of the price of gold, the investor gains, however, in the unlikely event of a fall in gold prices, the loss too will be borne by the investor.


To the Economy
The advantages to the Government and the economy are the following:


The possible disadvantage to the Government will be in the unlikely event of a substantial increase in gold prices. For this, the scheme proposes the creation of a Gold Reserve Fund which will absorb the price fluctuations and the fund will be continuously monitored for sustainability. Further, the issuance of the SGBs will be in tranches to enable the Government to maintain its issuance within its yearly borrowing limits.




KUB Rao Committee Report[3]
As per the KUB Rao Committee Report of 2013 , “large and sustained gold imports are a strain on the external sector’s stability. Given the precarious global economic situation and its impact on the Indian exports, there is a clear need to reduce the Current Account Deficit (CAD) considerably. Due to falling gold re-exports, India’s trade deficit as well as CAD as ratio to GDP worsened by 0.3 percentage points in 2011-12. Viewed from the fact that India has a large appetite for gold, it is desirable that the economy needs to moderate the demand for gold imports to bring down the CAD to a more sustainable level.”The Report also observed that ‘There is a need to consider introducing new gold-backed financial products to reduce the demand for physical gold.’


Rationale for a Gold Bond
India is one of the largest consumers of gold in the world and imports as much as 800-1000 tonnes of gold each year. It is estimated that roughly around 30 per cent of the import of gold in the country, on a yearly basis, is to meet the demand for gold for purely investment purpose. In this context the Finance Minister in the Union Budget 2015-16 Speech[4], made the following announcement:
Para 63. “I propose to: …
(ii) ...develop an alternate financial asset, a Sovereign Gold Bond, as an alternative to purchasing metal gold.  The Bonds will carry a fixed rate of interest, and also be redeemable in cash in terms of the face value of the gold, at the time of redemption by the holder of the Bond. 
The demand for gold for investment purpose is due to the returns and ease that the metal provides vis-à-vis other investment instruments. Given these benefits, the demand for gold for ‘investment purpose’ can be shifted away from physical gold, only if an alternate financial instrument for investment, which is linked to price movements of gold is made available. The newly introduced Sovereign Gold Bonds scheme aims at achieving this objective.


Earlier Gold Bond Schemes
The Gold Bond schemes that have been launched by the Government of India, so far, have been based on the idea of accepting a deposit of gold from the customers and providing them with certificates (or bonds) for a fixed maturity and interest payment. These included the 15-year Gold Bonds at 6 1/2 per cent (November 1962), 7 per cent Gold Bond 1980 Scheme (March 1965), National Defence Gold Bonds 1980 (1965), Gold Bond Scheme (1993).The present scheme is different from the earlier schemes since it involves the issuance of a gold bond on payment of rupees instead of taking a deposit of gold.

1. Government of India’s Gazette Notification F.No. 4(19)-W&M/2014 dated October 30, 2015.

2. (a)RBI Notification No. IDMD.CDD.No.939/14.04.050/2015-16 dated October 30, 2015.
(b) Detailed guidelines of the SGB issued by Ministry of Finance dated 15 September 2015

3. Report of the ‘Working Group to Study the Issues Related to Gold and Gold Loans NBFCs in India’, constituted by the Reserve Bank of India in April 2012, headed by Shri KUB Rao.

4. Union Budget 2015-16, Government of India.

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