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India has always cherished the culture and emotional value that gold carries, symbolizing wedding, festivals, and security investment. However, in the financial landscape of the country, the Indian government's move to end Sovereign Gold Bonds (SGBs) is a bittersweet moment. Launched by the Indian government in 2015 to overcome physical gold, the goal while introducing SGBs is to cut down on imports in the economy and present some safe and profitable investment alternatives before its citizens.
SGBs were new financial instruments and had the support of RBI on behalf of the Government. It offered double advantage: fixed annual interest at the rate of 2.5%, besides capital gains depending upon the price of gold. Moreover, these bonds nullify risks, like storage cost and risks due to physical gold. However, SGB did not gain mass popularity since most of the investors were attracted towards physical gold for sentimental and traditional reasons. The senior official cited fiscal strain as the reason for discontinuing Sovereign Gold Bonds (SGBs), which add to government liabilities. No SGBs were issued in FY25 despite a reduced Rs 18,500 crore allocation. Launched in 2015 to promote paper gold, SGBs have an eight-year maturity with 2.5% interest. Outstanding issuances stood at Rs 4.5 trillion by March 2023. The FY25 Budget reduced gold import duties, signaling a shift in gold market strategy.
There are a few reasons why the SGBs have been decided to be phased out. One of the key reasons is that the scheme failed to bring down the country's gold imports to any great extent. India is among the biggest importers of gold, and the annual consumption of the country is above 800 tonnes. The physical gold and the unawareness about SGBs had restricted their impact. Administrative issues like fixed issuance timelines and five-year lock-in period had made the bonds less attractive for liquidity seekers.The SGB scheme also puts a fiscal burden on the government. The fixed interest payout along with capital appreciation pegged to gold prices had been imposing an increasing fiscal burden. At a time when the government has renewed its focus on fiscal prudence, in a world of uncertainty, it does seem prudent to rechannel resources to other developmental projects.
Though the move to phase out SGBs seems retrograde, it definitely means that innovative alternatives are the necessity for India to meet its investment and economic needs. Digital gold platforms and gold ETFs have presented far more flexible options available as per the preference of modern investors. Such alternatives provide investors with an opportunity to earn benefits from the value of gold without the restriction provided by SGBs.
Thankyou.
Regards,
Kautilya, IBS Mumbai.
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