Looking for RBI gold bonds on Diwali? Here's why Centre may not issue them

Due to global uncertainties, gold prices have soared almost 30 per cent since last Diwali, prompting consumers to explore alternative investment resources to meet their financial goals

Diwali is one of the most important festivals for Indian households, which consider Dhanteras as an auspicious occasion to purchase gold or any precious metal. This year, however, Dhanteras – observed on Tuesday – saw a muted demand for gold, while relatively affordable metals like silver stole the spotlight.

 

Amid global uncertainties and tensions in West Asia, gold prices have soared almost 30 per cent (Rs 78,430 per 10 grams) since Diwali year, prompting consumers to seek alternative investment resources to meet their financial goals. Besides the stock market and conventional savings tools like Fixed Deposits, sovereign gold bonds (SGBs) – introduced by the Reserve Bank of India – were also gaining momentum among Indian investors. 

 

However, the Centre is unlikely to issue further trances of the SGBs because they are being seen as “complex and expensive instruments.”

What are sovereign gold bonds?

A substitute for holding physical gold assets, sovereign gold bonds are government securities denominated in grams of gold. Buying SGBs means purchasing a bond that represents a specific amount of gold that gets locked-in for eight years. This allows the asset to be appreciated over the course of time, without the need for their physical storage. In this case, the RBI was also providing an option for early redemption of the bonds after five years. 

How are returns calculated on SGBs?

On its website, the RBI explained: “Minimum investment in the bond shall be one gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family and 20 kg for trusts and similar entities notified by the government from time to time per financial year (April – March).

 

These bonds offer a fixed interest rate of 2.50 per cent per annum based on the initial investment amount, credited to the investor’s bank account semi-annually. Upon maturity, the redemption price of the bond is determined by the simple average closing price of 999 purity gold for the week preceding the maturity date.

Why did the Centre introduce SGBs?

In 2024, so far only one SGB has been issued by the RBI. In August, the central bank also announced premature redemption of the SGBs issued between May 2017 and March 2020, which indicates that no new SGBs will likely be released in the near future.

 

These bonds were introduced with two key objectives:

 

1. Reduce demand for physical gold, as India is the second largest importer of the precious metal after China

 

2. Allow the Centre to borrow at lower interest rates

Why has the Centre paused SGB issuance?

However, the decision to pause SGB issuance is likely as they were proving to be costly for the Centre, as increasing gold prices and currency fluctuations (fluctuation in the exchange rate between currencies) have strained government finances. For context, the price of gold is traded in dollars. When domestic currency falls against dollars, it takes more dollars to buy gold.