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In a significant development reflecting India's strategic financial management and gold market dynamics, the government has successfully issued a total of 67 tranches of Sovereign Gold Bonds (SGBs) as of the financial year 2024-25. These bonds have accumulated a substantial amount of gold, totaling 146.96 tonnes, with a market value of Rs 67,322 crore as of March 2025. This initiative not only serves as an effective tool for financing fiscal deficits but also provides investors with a secure, digital mode of holding gold, thereby reducing the demand for physical gold imports.
Introduced in November 2015, Sovereign Gold Bonds were conceived to curb gold imports and lower the current account deficit by encouraging households and institutions to invest in these paper gold instruments. Over time, SGBs have evolved into a popular savings instrument offering returns linked to gold price fluctuations, eliminating concerns related to storage and purity. They are issued in denominations of one gram of gold and multiples thereof, providing flexibility to a wide range of investors.
Issuance: The government has issued these bonds through multiple tranches, with the aim of harnessing individual and institutional gold holdings to reduce imports. The 67 tranches issued till FY25 reflect the government's continuous efforts to utilize this financial tool for managing fiscal deficits.
Redemption: SGBs are redeemed based on the prevailing market price of gold at maturity, ensuring that investors benefit from price appreciation while mitigating risks associated with physical gold ownership.
The government's liability for SGBs has increased significantly due to rising gold prices. Since the launch of the scheme, gold prices have surged by over 250%, leading to a substantial increase in the government's liability. As of now, the liability for outstanding bonds stands at approximately Rs 1.2 lakh crore. However, this figure is minuscule compared to India's total debt liabilities, which stood at Rs 181.74 lakh crore as of March 31, 2025.
To manage the risks and ensure stability in the SGB scheme, the government has established a Gold Reserve Fund (GRF). This fund is maintained within the Public Account and is used to credit price and interest differential amounts arising from gold price fluctuations. For FY25, the allocation to GRF was increased to Rs 28,605 crore, marking a significant rise from the previous year and providing a buffer for potential redemptions.
The recent volatility in gold prices and global economic uncertainties have made SGBs a more expensive form of borrowing for the government. As a result, no new tranches were issued in FY 2024-25, reflecting a strategic shift towards more cost-effective borrowing options like Government Securities (G-Secs).
Despite concerns arising from rising gold prices, SGBs remain a secure investment option due to the sovereign guarantee backing these bonds. The RBI's strategic accumulation of gold reserves further supports the government's ability to honor its commitments. Although investor concerns about repayment liabilities are understandable, experts consider default unlikely, given India's economic resilience and the RBI's hedging strategies.
As the SGB program nears its potential closure in its current form, the government's focus is shifting towards redeeming outstanding bonds. With nearly half of the gold underlying SGBs covered by the government-backed reserve fund, investor confidence is likely to remain high. The absence of new issues in FY25 aligns with broader fiscal strategies emphasizing low-cost borrowing alternatives.
In addition to serving as a savings instrument, SGBs have contributed to India's fiscal health by reducing the reliance on physical gold imports and providing an alternative source of revenue for financing fiscal deficits.
The SGB scheme has played a crucial role in influencing India's gold market dynamics by offering an alternative to physical gold. This has helped in reducing gold imports, which in turn supports the current account deficit and economic stability.
The issuance of 67 tranches of Sovereign Gold Bonds marks a significant milestone in India's financial strategy, integrating fiscal management with market dynamics. As the government continues to navigate economic challenges and opt for cost-effective borrowing options, SGBs remain a vital part of India's economic framework, offering investors a secure and attractive alternative to physical gold holdings.
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