Govt to decide on sovereign gold bond scheme continuation in September

Recently, SGB investors have expressed concerns due to market fluctuations and the government's decision to lower the customs duty on gold which may result in reduced returns on their investments

The government will take a call on whether to continue the Sovereign Gold Bond (SGB) scheme in September, which coincides with the borrowing calendar discussions with the Reserve Bank of India (RBI), a senior government official said, requesting anonymity.   

“A view on continuing SGB is likely to coincide with the RBI borrowing meeting in September. We see SGB not as a social security scheme, but as an investment option. Also, the government is not looking for an alternative to the gold bond scheme for now,” the official said. 

The perspective aligns with the Union Budget’s decision to reduce Customs Duty on gold and silver to 6 per cent from 15 per cent. Recently, SGB investors have expressed concerns due to market fluctuations and the government's decision to lower the duty on gold which may result in reduced returns.

“However, the government has no plan to stop issuing green bonds. Though, we are not happy with the yield,” said the official.  

According to the official, the government is likely to cancel specific issuances of green bonds if the cost of borrowing is higher than government securities.

The RBI cancelled the auction of 10-year green bonds on May 31 this year as traders refused to pay a greenium. Greenium signifies the premium investors are willing to pay for green bonds because of their sustainability impact.

The government plans to sell Rs 6,000 crore worth of 10-year green bonds on Friday. Diverging from the pattern of issuing the bonds in the second half of 2024, the ministry plans to issue green bonds worth Rs 12,000 crore in the first half of the current financial year (FY25). The green bonds were planned to be issued in two tranches of Rs 6,000 crore each for 10 years.

Foreign portfolio investment (FPI) in green bonds remains tepid with investments under the fully accessible route (FAR) standing at 5.79 per cent of the total holding.

RBI’s decision to withdraw free access to new 14-year and 30-year bonds under FAR for FPIs are part of prudent debt management and not a policy flip-flop, a senior government official informed.  

“There is a lot of space available for foreign investors to invest in existing bonds under FAR,” the official said.  

Some market participants suggest that the central bank’s decision is designed to safeguard returns for domestic long-term investors, such as life insurers and pension funds. The measure also seeks to temper heightened competition and demand from foreign investors drawn to bonds heavily featured in global indices, which often favour longer duration securities.  

Currently, FPI investment in FAR securities stands at Rs 2.08 trillion, having surpassed the Rs 1 trillion mark in October 2023.

Under the updated guidelines, foreign investments in the new 14-year and 30-year tenors will adhere to the existing RBI limits, which cap FPIs’ holdings at 6 per cent of a government bond’s outstanding limit.

The existing 14-year and 30-year FAR-designated debt securities remain accessible to foreign investors in the secondary market. Market analysts assert the move by the RBI will not significantly impact FPI investments, given the ample limits and alternative avenues available for foreign investments in domestic bonds.