Govt to Review Sovereign Gold Bond Scheme in Light of Recent Duty Cut on Gold Imports
The central government is set to evaluate the future of the Sovereign Gold Bond (SGB) program in September after reducing import duties on gold last month. Sources indicate the costs associated with financing fiscal deficits through these bonds are higher than the benefits received by investors, which could impact the scheme’s continuity going forward.
With gold prices declining nearly 5% since the customs duty was lowered to 6% on July 23rd, demand for the precious metal has risen. However, this duty reduction has also widened the gap between the expenses of utilizing SGBs for covering budget shortfalls versus the returns provided to holders.
An official familiar with the matter noted a “very conscious” past decision to scale back the frequency of SGB issuances, highlighting the disjunction between financing public spending through the instrument and meeting investors’ interests. They stated a holistic choice must be made in September regarding whether ongoing issuances align monetary needs and investment benefits.
The SGB program, launched to curb imports by channeling domestic demand, may be one of the government’s costlier deficit funding tools. A decision on new tranches this fiscal year will weigh carrying costs against advantages for stakeholders when borrowing levels are finalized. While SGBs remain an attractive fixed-return option, import levies have since lowered, impacting returns across gold assets.
The RBI and finance ministry will closely monitor premiums on ‘green bonds’ also amid current fiscal and economic conditions impacting various borrowing avenues. A new framework could result from thorough assessment of financing choices and market dynamics in light of recent policy shifts affecting domestic gold demand and prices.
