Introduction
In a significant move announced in the Budget 2024-25, the government has slashed the import duty on gold and silver from 15% to 6%. This reduction aims to boost domestic demand by lowering gold prices in India, potentially impacting the demand for Sovereign Gold Bonds (SGB).
Impact on Sovereign Gold Bonds
On the day of this announcement, SGB prices witnessed a decline of 2-5% on the National Stock Exchange. A source close to the matter revealed that SGBs have been an expensive proposition for the government, making it unlikely that they will continue issuing these bonds.
Redemption of SGBs
Investors who participated in the SGB scheme during 2016-17 (Series 1), issued in August 2016, are nearing their final redemption, scheduled for the first week of August 2024. The initial issue price of Sovereign Gold Bond 2016-17 (Series I) was Rs 3,119 with an annual interest rate of 2.75%. The redemption price is calculated using the average closing price of 999 purity gold as published by the India Bullion and Jewellers Association Limited for three business days preceding the redemption date.
Returns on SGBs
A senior government official stated, “We have provided a 9-11% return per annum in addition to an interest of 2.5%.” The current interest rate for the SGB scheme is 2.5% per annum, fixed for the entire tenure of the bond, which is eight years. The interest is credited to the investor’s account every six months.
Comparison with Mutual Funds
The source added, “With Mutual Funds, you get around 10-11% returns with risk; with SGBs, there is no risk. The scheme was too attractive, lacking economic rationale.”
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No New Issues Since February
There has been no issuance of Sovereign Gold Bonds since February this year. Import duties on gold have seen a steady increase over the years, from 2% in 2012 to 4% in Budget 2012-13, and to 15% in 2013. The government cited reasons such as curbing gold smuggling and managing the current account deficit for these hikes.
Government’s Stance on Gold Sector
A source noted, “The government had to roll it back because gold is an important employment-generating sector and contributes significantly to our exports.”
Conclusion
The reduction in import duty on gold and silver to 6% could signify the end of Sovereign Gold Bonds, given their high cost to the government and the attractive, low-risk returns they offer to investors. This shift is part of a broader strategy to balance economic growth and fiscal responsibility.