The soaring prices have led to a rapid increase in demand for paper gold, often known as gold exchange-traded funds (ETFs). despite the fact that ETFs’ outstanding size is less than that of SGBs.
The government’s outstanding debt on sovereign gold bonds (SGBs) has skyrocketed to a record Rs 1.5 lakh crore due to the dramatic increase in gold prices, which has increased by nearly 35% this fiscal year.
There are now 126 tons of outstanding SGB. Additionally, gold costs Rs 1,241 crore per tonne at current pricing. Rs 4,227 per gramme is the simple average of the issue prices of the last 58 issues (which have not yet reached the 8-year redemption period). Given current gold prices, the government’s debt has grown by almost 200% because it pays 2.5% interest on this gold annually (based on the purchase year’s price).
“The Indian government risks huge liability owing to SGBs, especially due to the increasing gold prices,” said Shekhar Bhandari, President of Kotak Mahindra Bank. From ₹6,664 crore in 2017–18, this obligation has grown by 930%.
According to the Reserve Bank of India’s (RBI) most recent statistics on the government’s outstanding SGB debt, there has not been much early redemption despite the steep price increase.
Beginning in the fiscal year 2024–2025, the government stopped using SGBs. February 2024 saw the issuance of the last SGB tranche, with the price of gold at Rs 6,263 per gramme. Prices have almost risen (over Rs 12,000) after then as well.
“Depending on the viewpoint, SGBs may be both an asset and a problem,” Bhandari said. Since its inception, the government has been able to restrict the import of around 150 tons of gold, which is the entire amount of bonds that the RBI has sold.
According to experts, SGB has lessened pressure on the rupee exchange rates and contributed to a significant decrease in gold imports.
Interestingly, the RBI has purchased more than enough gold to cover this responsibility, even though the government may have cut down on ordinary investors’ gold purchases. An indirect hedge is the RBI’s addition of gold to foreign currency reserves.
Hindu Undivided Families (HUFs), trusts, colleges, and individuals all see SGBs as a secure and alluring investment choice.
$10 billion in outstanding gold ETFs
The soaring prices have led to a rapid increase in demand for paper gold, often known as gold exchange-traded funds (ETFs). despite the fact that ETFs’ outstanding size is less than that of SGBs. According to the most recent Exchange Traded Funds data from the World Gold Council, India now has 77.3 tonnes of gold ETF outstanding due to rising demand. According to the statistics, this was worth $10 billion at the end of last month.
“This year, gold and silver have surpassed all other asset classes to become the greatest asset class,” said Chirag Mehta, CIO of Quantum AMC. As a result, investors are now much more interested in both precious metals. We see that the portfolio’s gold holdings have increased from 5% to 10%. As more investors begin to include it in their holdings, diversification will result, and future investments will continue. Due to SIPs, which are a constant flow at all price points, gold ETF assets are also increasing.