The Sovereign Gold Bond (SGB) scheme, introduced in 2015, was a novel attempt by the Indian government to curb gold imports and reduce the country’s current account deficit. Over the years, the scheme attracted a significant number of investors seeking to benefit from gold price appreciation and regular interest income. However, what began as a strategic move to raise low-cost capital has evolved into a substantial financial obligation for the government.
According to a recent report, if the government were to redeem all outstanding sovereign gold bonds as of April 1, 2025, it would need to shell out a staggering ₹12,06,92,00,00,000 – over ₹1.2 trillion or ₹1.2 lakh crores. This estimate is based on the prevailing gold price of ₹9,284 per gram.
In a written reply to Parliament, the government also noted that the outstanding value of these bonds as of March 20, 2025, based on the issue price, stands at ₹67,322 crores for approximately 130 tonnes of gold. This indicates that the government’s liability has swelled by 79% in absolute terms, excluding interest payments made over the years.
SGBs are redeemed based on prevailing gold prices, with the actual redemption value calculated using the average closing price of gold in the preceding week. As gold prices continue to rise, so does the redemption cost.
The first tranche of bonds, for example, had to be redeemed at a 128% premium. Including interest payouts, the overall outflow on this tranche was 148% higher than the amount originally raised. As more tranches mature in the coming years, a similar pattern could emerge, especially if gold prices continue their upward trajectory.
While the liability appears massive, not all bonds are set to mature at once. The government has already fully redeemed bonds from seven tranches and recently offered early redemption for the eighth tranche. The final tranche is not due for maturity until 2032, providing the government with a much-needed buffer to stagger redemptions over time.
As of March 20, 2025, bonds amounting to less than 17 tonnes of gold have been fully redeemed. This leaves a considerable balance still on the government’s books, with potential liability increasing further if gold prices continue to escalate.
Since its inception, the SGB scheme has resulted in the issuance of bonds equivalent to 147 tonnes of gold. Each bond is pegged to one gram of gold. In total, the government has raised ₹72,274 crores over 9 financial years through these issuances. The issue price per bond has ranged from ₹2,684 in the first tranche to ₹6,263 in the 67th tranche – closely reflecting the then-prevailing gold prices.
Interestingly, while the scheme may appear to be weighing heavily on the exchequer, the Reserve Bank of India (RBI) has simultaneously built a strategic hedge. According to a report, the RBI has quietly accumulated 321 tonnes of gold since the inception of the scheme. This move has served as a risk offset, shielding the system from the mounting liabilities of SGBs.
The RBI’s gold reserves have led to mark-to-market gains of approximately $20 billion. While these gains belong to the central bank, they are ultimately transferred to the government annually, offering a financial cushion amidst the rising cost of redemptions.
The SGB scheme has provided Indian investors with an efficient, paper-based alternative to physical gold, offering safety and returns tied to market performance. However, it has also created a growing fiscal liability for the government, especially in the context of rising gold prices.
The government’s redemption obligations, coupled with the interest payouts and price-linked bond maturity, underscore the complexities of financial instruments tied to commodity prices. Fortunately, the RBI’s strategic accumulation of gold offers a mitigating factor that could help ease the burden over time.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.
Investments in the securities market are subject to market risks, read all the related documents carefully before investing.
Published on: Apr 2, 2025, 3:36 PM IST
Team Angel One
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