Do not discontinue sovereign gold bonds: Hedge them

Hedging their payout risk would let Indian investors and the economy at large benefit from the idea

- AJIT RANADE

Sovereign Gold Bonds (SGBs) were introduced nine years ago. These were launched to give investors an opportunity to invest in the much-loved yellow metal in dematerialized form. It would be liquid and safe, could be mortgaged or traded, and exempt from capital gains tax at maturity. Investors benefit both from rising gold prices as well as currency depreciation. The intent of the scheme was to wean away Indians from their seemingly insatiable appetite for physical gold.

India has consistently been among the world's top importers of gold. Recently, the average annual drain on foreign exchange due to these imports has been upwards of $40 billion. That is eight times the average annual imports of military hardware. Or, in rupee terms, it is five times the annual budget allocation for the national rural employment guarantee scheme. Hence, any dent in the gold import bill saves precious foreign exchange, reduces India's trade deficit and helps deepen our financial sector. SGBs are part of formal financial savings, unlike just investment in the physical metal. The liability created by these bonds is purely in domestic currency, which poses a much smaller risk to the sovereign.

Since 2016, the government has cumulatively sold SGBs equivalent to about 150 tonnes of gold. This sale is less than its potential, given that in the initial years, SGB distribution suffered from indifference and neglect. These bonds were not marketed aggressively, nowhere like the gold loans pitched by flashy brand ambassadors. Retail investors had no recourse to small-ticket investment with the same ease as investing in mutual funds or stocks.