SGBs Midas touch to India’s import bill; experts also optimistic about electronic gold receipts

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If you thought sovereign gold bonds (SGBs) only serve as an efficient tool allowing the common man to park his funds in relatively risk-free debt instruments linked to gold rates, you are possibly missing the bigger picture surrounding this eight-and-a-half-year-old glittering instrument. The real contribution of this debt paper seems to be concealed in the impact it had on India’s import bill and providing relief to the Indian rupee in the forex market.

Considering the fact that the bonds wean away investors from investing in physical gold and that India imports most of its gold, the impact of SGBs in this financial year itself has been calculated to be a reduction of about 7-8% in the country’s import bill. This corresponds to a value of $3.26 billion of the bonds issued by the Reserve Bank this year.

What has fuelled optimism among the policymakers is that SGBs have risen to its highest popularity this year (2023-24), when RBI has sold bonds corresponding to 44.3 tonnes of the precious metal. This amount is the highest recorded since November 2015 when the debt instrument was introduced.

Cumulatively, SGBs have mopped up nominal investments of Rs 72,275 crore or $9,418 million which is the cost of 147 tonnes of gold.

Some think that the government can push further to expand the reach of SGBs to achieve a deeper reduction of the country’s gold import bill. Incidentally, this bill stood at $37.86 billion between April 2023 and January 2024.

Between April 2023 and December 2023 – the first three quarters of the current financial year, India imported about 648 tonnes of gold. The sharp rise of gold prices in the global markets – from about $1,800 levels in September 2023 to $2,180 now – applied brakes on demand. Therefore, assuming about 800 tonnes of gold imports this year, the bonds have shaved off 5.5% in quantity terms.

Some experts such as president of Kotak Mahindra Bank, Shekhar Bhandari, even thinks that the government should prompt jewellers to push SGBs to bring down the consumption of physical gold. “The government should focus on converting demand for coins and bars into SGBs. Banks should be motivated to market SGBs as a push product rather than a pull product, making bond selling more lucrative,” Bhandari told the Business Standard.

To bring down the import bill, the government launched Gold Monetisation Scheme (GMS) along with the SGBs but it failed abjectly, especially when benchmarked against the success of the bonds. While the bonds corresponding to 147 tonnes of the precious metal has been sold so far, GMS has yielded only one-tenth of that quantity.

Some experts think that the proposed electronic gold spot exchange might offer a solution to GMS and also result in savings on the gold import bill.

“Electronic gold receipts (EGRs), tradeable on the spot exchange, can be a solution to convert idle gold held by households into a productive asset,” Surendra Mehta, national secretary of the Indian Bullion and Jewellers Association (IBJA) told the newspaper.

Right now, the minimum investment in SGBs allowed is the price of one gram of gold (as declared before each issuance). The IBJA secretary said to multiply the popularity of these bonds among small investors the bond size should correspond to 0.100 gram (or, one-tenth of the existing rate). The interest on these bonds should be payable once a year at a tax-free rate of 2.5%. If this rate implies a revenue loss for the government, the rate could be dropped to 2%.

Significantly, SGBs have offered tax-free returns between 12.5% and 13.5%, depending on the investors’ tax breaks, said the report. However, there has been a debate in some quarters whether those who invest in SGBs would have purchased the metal if they had not bought the bonds.

The World Gold Council too is optimistic about the future of SGBs. “SGB has been an excellent instrument and has proven that gold can be monetised with the right incentives, showing immense potential. GMS should be reviewed from this perspective,” said Somasundaram PR, India chief executive officer of the World Gold Council.

He also sounded hopeful about the potential of the EGRs in drawing the metal lying idly with families and other institutions in the market that would eventually raise transparency in the industry.