Sovereign Gold Bonds Scheme
About the Scheme
- Sovereign Gold Bonds (SGBs) are bonds that are issued by the RBI on behalf of the Government on payment of rupees but denominated in grams of gold.
- The value of these bonds is tied to the value of gold. On redemption, the investor gets interest income and the prevailing price of gold.
- These bonds are thus different from usual Government securities (G-secs) as the redemption value at the time of maturity is not a fixed sum, but linked to the price of an underlying commodity called gold.
- It seeks to encourage people to buy gold bonds instead of actual gold.
Advantages and disadvantages
To the Investor
- The advantages to the investor in investing in SGB instead of gold are the following:
- Interest earnings on an otherwise dead asset;
- Ease of storage and handling gold, while preserving its advantage of earnings in terms of appreciation of its prices in future;
- An alternate instrument for investment;
- The only possible disadvantage to the investor is that, while in the event of appreciation of the price of gold, the investor gains, however, in the event of a fall in gold prices, the loss too will be borne by the investor.
To the Economy
- The advantages to the Government and the economy are the following:
- Reduction in the cost of Government’s borrowings– the current borrowing cost from the domestic market is around 7-8 per cent. Thus, an interest payment below this level is a yearly saving for the Government on account of its borrowing cost. This difference can be used by the Government to cover the appreciation of gold prices payable to the investors at the time of redemption.
- A decrease in the price of the gold will be a gain for the Government.
- It will reduce the demand for physical gold to some extent and thus helps in reducing the annual demand for import of gold.
- The possible disadvantage to the Government will be in the event of a substantial increase in gold prices.
- For this, the scheme proposes the creation of a Gold Reserve Fund which will absorb the price fluctuations and the fund will be continuously monitored for sustainability. Further, the issuance of the SGBs will be in tranches to enable the Government to maintain its issuance within its yearly borrowing limits.
Why in the news?
- Government of India is set to open Sovereign Gold Bonds for subscription during the period August 22-26, 2022.
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