Historically, the RBI issued 10-14 tranches of SGBs annually. Yet, over the last two years, only four series were released, suggesting a slowdown.
Every year, the Reserve Bank of India (RBI) typically releases Series I of Sovereign Gold Bonds (SGBs) between April and June. However, as we sit in August, there’s still no news of the release for 2024.
This delay is raising questions and concerns. Historically, the RBI issued 10-14 tranches of SGBs annually. Yet, over the last two years, only four series were released, suggesting a clear and deliberate slowdown.
Interestingly, despite this slowdown, the last fiscal year saw significant subscriptions of 443 lakh units, compared to 122 lakh units in FY23, 270 lakh units in FY22, and 323 lakh units in FY21.
So, what’s driving the slowdown in the release of the next tranche of SGBs? SGBs were introduced in 2015 with a specific purpose: to curb the growing current account deficit by reducing gold imports. The idea was to provide an alternative to physical gold purchases by offering digital gold with a fixed 2.5% interest rate.
This initiative was based on the assumption that gold prices would remain relatively stable. Between 2012 and 2018, gold prices remained relatively stagnant, fluctuating within a narrow range. During this period, the government saw an opportunity. By offering SGBs at a 2.5% interest rate, the government could raise funds at a lower cost compared to issuing government bonds, which typically carry a 7% interest rate.
The plan was financially sound as long as gold prices remained within a modest range. However, the absence of physical gold backing for SGBs significantly altered the financial calculations.
The onset of the COVID-19 pandemic in 2020 and subsequent geopolitical tensions brought about unprecedented changes in the global economy, and gold was no exception. Gold, often seen as a safe-haven asset during times of economic uncertainty, saw its price surge dramatically.
In 2019, gold prices were around Rs35,000 per 10 grams. By 2024, the price had nearly doubled to nearly Rs75,000 per 10 grams. This steep rise in gold prices has significantly increased the government’s liability on the SGBs issued during the period of lower prices.
The initial strategy was based on the premise that the government could offer a low-interest product with limited exposure to gold price volatility. However, with gold prices skyrocketing, the financial burden on the government has grown considerably. Each SGB issued now represents a much larger financial commitment than originally anticipated. The 2.5% interest that seemed attractive in a stable gold price environment now appears less so when juxtaposed with the government’s growing liabilities.