Sovereign Gold Bond (SGB) Scheme May Be Discontinued: What It Means for Current Investors

The Sovereign Gold Bond (SGB) scheme, introduced in 2015 as an alternative to physical gold, is set to be discontinued. Finance Minister Nirmala Sitharaman confirmed this decision during the post-Budget media briefing on February 1. The government cited the high cost of borrowing associated with the instrument as the primary reason for its discontinuation. This move raises concerns about the future of existing investors and the broader implications of the decision.

Why is the SGB Scheme Being Discontinued?

Economic Affairs Secretary Ajay Seth elaborated on the rationale behind the decision, stating that the scheme was originally introduced to raise funds from the market and to curb gold imports. However, in recent years, SGBs have proven to be a relatively expensive borrowing mechanism for the government. Despite an allocation of ₹18,500 crore for SGBs in the FY25 Budget (down from ₹26,852 crore in the interim Budget), no fresh tranches of SGBs have been issued in the current fiscal year. The last issuance of SGBs took place in February 2023, amounting to ₹8,008 crore.

The Evolution of the SGB Scheme

The SGB scheme was launched in November 2015 as a means to provide an alternative to physical gold while offering an interest-bearing instrument to investors. The bonds had an 8-year maturity period, with partial redemption allowed after 5 years. Initially, the interest rate was set at 2.75% per annum, later reduced to 2.5%, which remained fixed for the entire tenure.

What Will Happen to Current Investors of SGB?

With the discontinuation of the scheme, existing investors may be concerned about the status of their holdings. However, the government has not announced any changes to the redemption and interest payment schedule for outstanding SGBs. Investors holding SGBs will continue to receive the promised 2.5% annual interest until maturity, and redemptions will proceed as per the original terms.

Since its inception, the total issuance under the scheme has amounted to ₹45,243 crore as of FY23, with an outstanding amount of ₹4.5 lakh crore by March 2023. Investors looking to exit early may still do so via the secondary market, where SGBs are listed on stock exchanges. The discontinuation mainly impacts new investors who were considering future tranches.

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