The Reserve Bank of India’s (RBI) Sovereign Gold Bond (SGB) scheme was widely regarded as a safe investment option in India. However, following a sharp rise in gold prices, the RBI recently announced the discontinuation of SGB issuances, a move that likely disappointed investors.
In a recent development, the RBI declared the redemption rate for its SGB Series IV issued in March 2017, highlighting the significant returns earned by investors and attracting considerable attention.
Let’s explore the announcement, the returns generated by SGBs, and whether the government’s decision to discontinue the scheme was a strategic move.
What’s Happening?
The RBI has announced the redemption rate for its SGB Series IV, issued in March 2017, which matured on March 17, 2025, after completing its eight-year tenure. The final redemption price has been set at Rs 8,634 per gram, based on the average closing price of gold recorded on March 11, 12, and 13, 2025.
With this redemption price, investors in SGBs have made substantial profits, along with the added benefit of tax-free investment. The entire capital appreciation is exempt from long-term capital gains tax, provided the investment is held until maturity.
How Much Did SGB Investors Gain?
The SGB 2016-17 Series IV was issued at a price of Rs 2,943 per gram, including a Rs 50 discount for online applicants. Based on the final redemption price of Rs 8,634 per gram, investors have earned an absolute return of 193% over the tenure, excluding interest income.
Additionally, SGBs offer a fixed interest rate of 2.50% per year, paid semi-annually throughout the tenure. However, since the interest is credited directly to the investor’s bank account, there are no compounding benefits.
Gold’s Historic Rally: What’s Driving It?
Investors worldwide are flocking to gold as a safe-haven asset amid trade wars, economic uncertainty, and recession fears in the US. This has propelled gold prices to record highs.
Currently, gold is trading at over $3,000 per ounce in international markets, while on the MCX (Multi Commodity Exchange), it is around Rs 88,380 per 10 grams. According to the India Bullion and Jewellers Association, gold (999 purity) is priced at approximately Rs 88,760 per 10 grams as of March 20, 2025.
Several factors have contributed to this rally:
Post-pandemic demand surge
Global central banks accumulating gold reserves
Inflation concerns
Trade war tensions intensified by Trump’s reciprocal tariff plan
Growing expectations of monetary policy easing by the US Federal Reserve
Sovereign Gold Bonds: Golden Trap for the Government?
Launched in 2015, the SGB scheme was originally introduced to promote gold investment in digital form and reduce the purchase of physical gold. However, its discontinuation is largely due to the government’s growing liability from the high borrowing costs associated with the scheme.
So far, the government has issued SGBs worth Rs 72,000 crore between November 2015 and February 2024. Even after the redemption of earlier tranches, investors still hold SGBs equivalent to 1,32,000 kg of gold. At current market prices, this represents a massive liability of Rs 1.12 lakh crore for the government.
The government is particularly concerned that if gold prices continue to rise, its redemption liability could far exceed current estimates. Since SGBs have an eight-year tenure, the last batch will mature in 2032, adding further financial pressure.
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What’s Next?
Although the SGB scheme has been discontinued, investors still have alternative options to invest in gold digitally, such as Gold ETFs and Gold Mutual Funds. However, these do not offer the same unique benefits as SGBs, such as tax-free capital appreciation at maturity and fixed interest income.
For the government, managing the growing liability of outstanding SGBs remains a key challenge. If the gold rally continues, redemption costs could put additional strain on fiscal resources. Whether the government will reintroduce the SGB scheme with modifications in the future remains uncertain. For now, its primary focus will be on handling existing liabilities.
*This article is for informational purposes only. This is not investment advice.
*Disclaimer: Teji Mandi Disclaimer
