Sovereign Gold Bonds missed amid PM's austerity appeal, import duty hike, Pg11

Key Highlights:

• The Indian government is considering measures to address the falling rupee, including raising import duties on gold, silver, and platinum.
• Sovereign Gold Bonds (SGBs), launched in 2015 and discontinued in early 2024, provided high returns (over 200%) to investors but were perceived as costly for the government.
• In FY26, India's gold imports reached $72 billion, a 24% increase from FY25, accounting for over 9% of total imports.
• Following the discontinuation of SGBs, investments in gold Exchange Traded Funds (ETFs) have surged, necessitating increased gold imports.

Detailed Insights:

• The hike in import duties on precious metals has historically had a mixed impact on controlling gold imports, with instances of increased smuggling to meet demand.
• SGBs aimed to curb physical gold imports by meeting investment demand through bonds, but the government discontinued the scheme due to the perceived high cost of borrowing.
• Despite an expense of nearly Rs 18,000 crore for interest and redemption of SGBs issued from 2015 to 2024-25, it was a small amount compared to the government's overall borrowing.
• The FY27 Union Budget restricted capital gains tax exemption only to SGBs held until maturity, impacting bonds traded in the secondary market.
• Increased investment in gold ETFs, particularly after the COVID-19 pandemic, has led to record gold imports to back these funds, further straining the import bill.
• A structural shift in India's gold demand has been observed, with investment demand comprising nearly 70% of total demand in January-March 2026, while jewellery demand has fallen to around 30%.
• Meeting the investment demand for gold is crucial to curb imports and stabilize the rupee, as Indians' affinity for gold and limited domestic supply drive significant imports.

Key Concepts Involved:

• Sovereign Gold Bonds (SGBs): Government securities denominated in grams of gold, offering an alternative to holding physical gold.
• Exchange Traded Funds (ETFs): Investment funds traded on stock exchanges, holding assets like gold and tracking their price movements.
• Import Duty: A tax imposed on goods imported into a country, aimed at increasing their cost and reducing demand.