Sovereign Gold Bond Scheme: A Case of Fanciful Policy Planning

The Sovereign Gold Bond Scheme: Genesis, Impact, and Lessons from the Surge in Gold Prices

By Sesh Kumar Pulipaka

New Delhi, April 24, 2025: The Sovereign Gold Bond Scheme, launched by government via RBI, aimed to reduce gold imports and offer investors an interest-yielding alternative. With soaring gold prices, SGB’s financial impact, legacy, and lessons for future seek close scrutiny on broader policy making within the government.

The SGB Scheme was intended as a strategic policy initiative to curb physical gold imports, reduce the current account deficit, and offer investors a formal, interest-yielding alternative to holding gold.

With the global surge in gold prices, especially in recent months, questions have arisen regarding the financial impact of SGB redemptions on government finances and whether the scheme, viewed in hindsight, represents prudent fiscal innovation or an expensive policy misadventure.

Background and Evolution of the Sovereign Gold Bond Scheme

The SGB scheme was launched in November 2015, at a time when India’s voracious appetite for physical gold was exerting substantial pressure on the current account deficit and straining foreign exchange reserves.

Traditional household investments in gold, estimated at over 20,000 tonnes, were seen as “dead assets”, contributing little to economic productivity and exposing the country to volatile gold imports that could destabilize the macroeconomy.

The SGB Scheme was conceived as a bold alternative, allowing investors to buy gold in a dematerialized form directly from the government.

Under the scheme, investors could purchase government-backed bonds denominated in grams of gold, with a fixed annual interest rate (set at 2.5 per cent) and redemption or maturity proceeds linked to the prevailing market price of gold.

This hybrid structure offered dual returns: a guaranteed interest income and the potential for capital appreciation in line with global gold prices. The bonds carried an eight-year maturity with the option of early redemption after five years, synchronized with the semi-annual interest payment dates.

In the process, the government sought not just to moderate physical gold imports but also to “financialize” household savings, channeling them into the formal sector while reducing the economy’s vulnerability to external shocks.

Recent Developments and Financial Impact Amid Gold Price Surge

In the wake of significant global economic uncertainty, gold prices have surged, especially through 2024 and early 2025, amid geopolitical crises and persistent inflation. This has brought the SGB scheme into sharp focus for its fiscal implications.

According to the RBI, recent redemptions have set records for capital gains delivered to investors. For example, the SGB 2017-18 Series III, issued at ₹2,964 per unit in October 2017, was redeemed in April 2025 at ₹9,221 per unit, reflecting more than a threefold increase in value.

Similarly, the SGB 2019-20 Series V, issued at ₹3,788 per unit, was redeemed at ₹9,069 per unit in April 2025. The 2017-18 and 2018-19 tranches scheduled for premature redemption in April 2025 will be paid out at ₹9,669 per unit, based on the simple average of closing prices for 999 purity gold as published by the India Bullion and Jewellers Association (IBJA).

These figures underscore the scheme’s success from an investor standpoint but also highlight a crucial fiscal consequence: at maturity or redemption, the government must pay out the gold-equivalent value at prevailing market prices.

While the government initially receives funds from investors, these proceeds are not “free capital”. They constitute a liability, as the redemption obligation rises in tandem with gold prices. Thus, during periods of sharp appreciation, the outgo on redemptions can exceed the original proceeds by a substantial margin, putting pressure on government finances.

The fiscal impact is compounded by the 2.5 per cent annual interest outgo, which continues irrespective of movements in gold prices.

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Prudent Policy or Fiscal Misadventure?

With the benefit of hindsight, the SGB scheme reveals itself as a double-edged sword. On the positive side, it could be considered to have achieved several policy goals: some reduction in physical gold demand, increased formalization of household savings, and the creation of a new asset class for Indian investors.

The scheme can be argued to have been popular, with over ₹38,693 crore (approximately 91 tonnes of gold equivalent) mobilized through SGBs since inception, according to RBI data and official government disclosures as of March 2024.

However, the very success of gold as a “safe haven” investment has become a fiscal headache. With gold prices soaring from about ₹2,964 per gram in 2017 to over ₹9,600 per gram in April 2025, the government’s redemption obligations have ballooned. This is no longer a notional risk.

The cessation of fresh SGB issuances in the Union Budget 2025 signals an explicit recognition of this fiscal vulnerability. As redemptions pick up pace, the outflow from government coffers to honour SGB maturities could become substantial — potentially undermining the original intent of using these funds for productive investment or deficit management.

In this sense, what was intended as a demand-management tool for the macroeconomy may end up as an expensive fiscal liability, especially in a period of sustained gold price appreciation.

The SGB scheme, structured as a “gold price tracker” with a fixed interest kicker and sovereign guarantee, failed to adequately price the embedded risk of long-term gold price inflation.

No effective hedging mechanism was built in for the government, making it a “one-way bet” for investors in times of macroeconomic stress. The government’s exposure to redemption risk is direct and unhedged, and the growing divergence between redemption value and original subscription proceeds is now being realized.

The Sovereign Gold Bond Scheme achieved a degree of formalization in household gold savings and provided a robust alternative to physical gold. Yet, as recent redemption data starkly demonstrates, it has also saddled the government with a ballooning liability in an environment of sharply appreciating gold prices.

While investors have enjoyed excellent returns, the fiscal calculus for the government has grown increasingly adverse — culminating in the Budget 2025 decision to halt new issuances.

The SGB experience underscores the importance of careful risk pricing and fiscal foresight in designing government-backed investment products.

Future policy design must reckon with the possibility of extreme market movements and incorporate dynamic risk-sharing or hedging mechanisms to protect the sovereign balance sheet. As things stand, the SGB story is a powerful reminder that financial innovation, while necessary, must never come at the cost of fiscal prudence or sustainable public finance.

(This is an opinion piece; views expressed solely belong to the author)

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