Midas touch: Centre plans record mopup through gold bonds in FY25

Encouraged by the Midas touch of gold bonds, the Centre has planned to issue a record amount of sovereign gold bonds in the next fiscal, ramping up the total float to 10% over the current financial year and mop up Rs 29,638 crore through this paper gold instrument, The Economic Times has reported.

The appetite for this instrument has gone up by such an extent that while the finance ministry had budgeted to raise Rs 11,200 crore through SGBs in the current fiscal, the revised estimates has put the gross collection at Rs 26,852 crore – a rise of about 2.4 times.

Net of redemption, the collection estimated at Rs 26,138 crore in FY25. The figure is Rs 25,352 crore in the current fiscal.

“It (elevated gold bond issuance) was partly driven by a sharp increase in investor interest due to the safe haven status of gold amid global economic and geopolitical turmoil and expectations of a good appreciation of gold prices in the medium-to-long term,” a senior government official told the newspaper.

“The spike in gold bond offtake is driven primarily by three things: portfolio diversification by investors; growing awareness about the scheme; and larger investible surplus, especially among small-time investors,” said Harish Galipelli, director at ILA Commodities India.

The SGB is attractive for those exploring options to park funds in gold-backed safe assets instead of the physical gold. The gold monetisation scheme is an avenue that the government provides to individuals and trusts (typically those running temples etc) to bring out gold lying idle in their possession which would eventually raise supply in the market.

The government pays an annual interest of 2.5% to the investors who also gain from the appreciation in the price of the yellow metal. The SGB has been rising in popularity since it was launched in 2015, the year in which gold monetisation programme was also introduced. The objective was to provide an alternative to purchase of the metal which has a telling impact in pushing up the country’s current account deficit. India imports a large amount of gold every year.

The government has estimated that as much as Rs 31,168 crore would be raised through gold monetisation and SGBs in FY25. The revised estimate this year has pegged the cumulative amount at Rs 28,240 crore. The net collection in FY25 (BE) could reach Rs 27,571 crore – about 3.4% higher than the current year’s revised estimate.

The SGB is attractive for those exploring options to park funds in gold-backed safe assets instead of the physical gold. The gold monetisation scheme is an avenue that the government provides to individuals and trusts (typically those running temples etc) to bring out gold lying idle in their possession which would eventually raise supply in the market.

The attraction of SGB is set to rise, especially after it provided “stellar returns” in 2023, felt Naveen Mathur, director (commodities & currencies) at Anand Rathi Shares and Stock Brokers. The returns last year came after two years of flat returns. Since the global financial crisis of 2007, gold has provided returns at a CAGR of 11-12%, thereby further boosting the confidence of investors as an instrument to safely diversify their portfolio.

While buyers of jewellery need to shell out a lot of money in the form of making charges, SGBs have no such charges, and are, therefore, cheaper. They also do not have management costs such as gold exchange-traded funds.

However, the recent spectacular bull run has taken some sheen away from the SGBs.