Why Sovereign Gold Bond Scheme needs a review

India mines just 0.1% of the globally mined gold however it has almost 25% share of the overall global annual demand of the yellow metal. This puts a lot of pressure on country’s current account and foreign exchange reserves. In the annual Union Budget of 2015, with the intent of enabling purchase of gold in electronic form and reducing gold imports, government announced the Sovereign Gold Bond Scheme (SGBS).

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Sovereign Gold Bonds(SGBs) are government securities denominated in grams of gold. Investors have to pay the issue price in cash and the bonds are redeemed in cash on maturity basis the then prevailing market price of gold. SGBs offer a much superior alternative to investors looking to take exposure to gold. Under the scheme, not only the risks and costs of storage are eliminated, investors are further promised an assured periodic coupon (presently at 2.5%). To further sweeten the deal for the investors, a complete tax exemption is given on the capital gains arising on redemption of Sovereign Gold Bonds at maturity. While a great investment option for the investors, the scheme exposed the government to price fluctuation risks considering the scheme was neither backed by physical gold nor hedged by the government (also highlighted by Niti Aayog Watal committee). With the recent rally in the yellow metal prices, these risks have come to the fore and this may force the government to go back to the drawing board and revamp the scheme.