Here's why India's sovereign gold bond scheme was a flawed policy from start
They did not go wrong in predicting future gold prices, but they did go wrong in integrating the market price of gold into their policy and balance sheet.
They did not go wrong in predicting future gold prices, but they did go wrong in integrating the market price of gold into their policy and balance sheet.
They did not go wrong in predicting future gold prices, but they did go wrong in integrating the market price of gold into their policy and balance sheet.
Ever imagined a gold ETF without gold? The Sovereign Gold Bonds (SGB) issued by the Reserve Bank of India (RBI) on behalf of the Government of India (GoI) resemble an ETF, but unlike conventional funds, they lack the underlying asset and have a maturity date.
An ETF is a mutual fund (whose units are traded on exchanges just like a stock) that invests the pooled money of investors in the assets it holds – in this case, gold. The ETF's market price tracks gold, and investors exit by selling in the market, as there is no redemption.
SGBs payout a fixed 2.50 per cent yearly and all the gold returns on maturity. Also, no gold as specifically earmarked means there should be redemption, without which investors may be reluctant to invest. But how can a central bank run a mutual fund without the assets it is supposed to hold and pay interest on top of it? Actually, SGBs are government borrowings by way of bonds having fixed rupee interest plus floating gold returns. And certainly it's not a gold ETF, though it looks like one in some ways.
Its main goal was to reduce physical gold imports into India despite the Indian craze for gold. Gold imports have to be paid for with foreign exchange, and India runs a trade deficit (the excess of imports over exports). So, to make the forex available to the gold importer paying in Indian INR, we have to attract forex through investments and borrowings. Or use existing forex reserves. Both of which impose a cost. So why not let Indians get the gold price rise without physical imports and their costs? Thus came SGB. The assumption was that SGB payouts would be less than the physical import-related forex costs. But that was not to be. Across various issuances of SGBs from 2015 through 2024, annualised returns – the difference between current and issue prices expressed as an annual rate – range from 18 to 56 per cent! To which one must add the fixed 2.50 per cent.
Such payouts on SGBs are an expenditure for the Government and add to the fiscal deficit – the excess of the Government's expenditure over its income – which is filled first with borrowings and then with the taxes we pay.
Another aim of SGB could have been to redirect funds from gold, the physical asset, to financial securities, thereby making more funds available and lowering the cost of funds. This it did, but at a high cost. And if the redeeming holders buy physical gold with the redemption proceeds, the only effect is postponement – not what the Government intended.
So where did RBI and the Indian Government go wrong? The first tranche of SGB was issued in 2015, with the latest (and hopefully the last) in 2024. Much of the sharp appreciation in gold occurred in 2025, amid economic turbulence. Could RBI or anyone else have foreseen all of this? Certainly not.
Can RBI and the Government then walk away blameless? Certainly not. What if the gold prices had stagnated and the Union Government made big savings on interest costs? That too deserves criticism. Just as the inability to forecast gold appreciation doesn't deserve brickbats, the ‘ability’ to predict stagnant gold prices doesn't deserve kudos.
They did not go wrong in predicting future gold prices, but they did go wrong in integrating the market price of gold into their policy and balance sheet. And not how gold prices moved later. That is bad public policy; something which it should learn from and never repeat.