Due to the steep cost, the government stopped issuing new SGBs after February 2024. |
Mumbai: Sovereign Gold Bonds (SGBs) were introduced in 2015 by the Indian government to raise funds for its budget without increasing debt through traditional borrowing. These bonds allow people to invest in gold without physically owning it. Instead, they get a certificate that represents gold, and the government pays interest on it.
The idea was simple: reduce India’s dependence on gold imports, which would help control the current account deficit, and raise funds cheaply. The bonds were issued in 67 tranches over nine years, raising around Rs 72,274 crore from investors.
The Growing Cost of SGBs
While the scheme sounded promising, it has become costly for the government. As of March 2025, the government’s total liability for redeeming outstanding SGBs was Rs 1.2 trillion (or Rs 1.2 lakh crore) at the prevailing gold price of Rs 9,284 per gram. This is nearly 79 per cent higher than the original debt the government took when these bonds were issued.
The problem is that SGBs are redeemed based on the average gold price of the week before redemption. With gold prices rising sharply—up by over 250 per cent since the first tranche—redeeming these bonds has become more expensive than anticipated.
For example, the first tranche of bonds had to be redeemed at a 128 per cent premium. Adding interest payments, the government paid 148 per cent more than what it originally raised. Subsequent tranches were even costlier, with returns of 162 per cent, 146 per cent, and 142 per cent for investors in different tranches.
Government’s Response to Rising Costs
Due to the steep cost, the government stopped issuing new SGBs after February 2024. Finance Minister Nirmala Sitharaman acknowledged that the bonds were being “discounted” in some ways.
To manage the rising liability, the government has been depositing money into a Gold Reserve Fund (GRF), which acts as a cushion against the high redemption costs. In FY24, Rs 3,552 crore was deposited, and the budget for FY25 was increased to Rs 8,551 crore, with revised estimates showing Rs 28,605 crore—almost three times the initial allocation.
RBI’s Strategic Hedge Against SGB Liabilities
While the government faces this financial strain, the Reserve Bank of India (RBI) has been quietly building a gold reserve since the inception of the SGB scheme. As of now, the RBI holds 321 tonnes of gold as a strategic hedge against the rising SGB liabilities. This has helped offset the government’s risks and even generated around USD 20 billion in mark-to-market gains.
Though this gain belongs to the RBI, any profits it makes are transferred to the government annually. This means the government still benefits indirectly, even though it’s paying more for the SGB redemptions.
While SGBs were meant to be a cost-effective borrowing tool, rising gold prices have made them expensive for the government. However, the RBI’s gold reserves have helped manage the situation, turning what could have been a financial crisis into a more manageable risk. The government’s focus now is on finding more cost-effective ways to raise funds while using the GRF and RBI’s gold holdings as buffers.
