Sovereign Gold Bonds (SGBs) are losing their luster as collection through these bonds has seen a decline of around 46 per cent in FY 2022-23 compared to FY 2021-22. Interestingly, the return on investment was in the double digits.
Several reasons include lack of price correction and resulting higher issue prices. The issue prices of ten tranches during F 22 ranged between ₹4,777 and ₹5,109 per gram. However, in FY23, the prices of the four tranches ranged between ₹5,041 and ₹5,611. Interesting way, India’s gold imports fall 24.15% to $35 billion in 2022-23 due to global economic uncertainty and high import duties on gold.
Government borrowing data collected by the Finance Ministry, total collection through SGB (including gold monetization scheme) was over ₹7,100 crore in FY23, up from over ₹13,100 crore ₹ in FY22. Collection through SGB is part of overall government borrowing. Quarterly data on overall borrowing is released after a three-month lag, meaning data through March 31 will be released in the last week of June.
Vandana Bharti, Head of Commodities Research at SMC, says that normally, gold sees a correction between July and September, but in FY23, this did not happen. At the same time, the stock market defied fears of a recession and continued to rise, which had a positive impact on mutual funds. “As SGB is an 8-year scheme, people would prefer to go for a shorter duration investment option and they find it in stocks and mutual funds,” she said.
According to RBI, SGBs are government securities denominated in grams of gold. They replace the holding of physical gold. Investors must pay the issue price in cash and the bonds will be repaid in cash upon maturity. The bond is issued by the Reserve Bank on behalf of the Government of India.
Despite lower collection, experts still believe that SGB is a better option given the government-guaranteed capital and interest, which means eliminating the risk of default. They therefore advise parking part of the total resources. Naveen Mathur, director (commodities and currencies) at Anand Rathi Shares and Stock Brokers, says SGBs reflect the price of gold like gold ETFs do. Still, they can pay 2.5 percent annual interest on the principal amount. Above all, it is an excellent investment to diversify portfolio risk.
“At present, where global economies face considerable risk of slowdown in the coming years due to higher interest rates, gold is often considered an effective investment instrument to diversify the risk of its portfolio, where at least 10 to 15 percent of the total investment allocation should be considered over a time horizon of 5 to 8 years,” he said.
Bharti felt that while an interest of 2.5 per cent, calculated at the issue price, on the SGB was the icing on the cake; it will be more attractive once the overall interest rate sees a downward trend. She advises keeping 5 percent of total resources to invest in SGB.
For the first half of the current financial year, the government, in consultation with RBI, planned two installmentsthe first of which closed earlier this week with an issue price of ₹5,926 per gram.