India’s insatiable appetite for gold is the stuff of legend—woven into its cultural fabric, cherished as a store of wealth, and hoarded across generations. Yet, in 2015, the government sought to tame this golden obsession with the Sovereign Gold Bond scheme, a move that now gleams more as a policy miscalculation than a financial masterstroke.

What was designed to ease pressure on the current account deficit and foreign exchange reserves by diverting demand from physical gold to financial gold has backfired spectacularly. By offering a 2.5% annual interest and tying redemption payouts to soaring gold prices, the government minted a fiscal nightmare, locking itself into a rising liability with each tick of gold’s ascent.

This year, the scale of the miscalculation became stark. A gold bond issued in March 2017 at ₹2,893 per gram—including a small discount—was redeemed at a staggering ₹8,624 per gram, a near-tripling in value. In addition, the investor got interest of 2.5% per annum. That windfall for investors translates into a mounting burden on the exchequer. With 146.96 tonnes of gold-equivalent bonds issued since 2015 and just 16.85 tonnes redeemed so far, the worst may be yet to come.

For a government struggling to rein in its fiscal deficit, the Sovereign Gold Bond scheme is now a ticking time bomb.

Fool’s Gold
The Reserve Bank of India played a pivotal role in crafting this financial alchemy, but did it mislead the government into believing it could outsmart centuries of gold-hoarding instincts? The RBI’s rationale was sound in theory—reduce gold imports, ease pressure on the rupee, and provide a tax-efficient alternative to physical gold. Yet, it grossly underestimated one key factor: the relentless rise in gold prices.

At the heart of the crisis is a simple misjudgement—the government believed it could persuade Indians to embrace paper gold while keeping liabilities in check. What it failed to foresee was that tying redemption values to market prices would expose it to unchecked fiscal risk. The creation of a Gold Reserve Fund to offset some of this risk was akin to throwing copper coins at a golden debt—insufficient to absorb the rapid appreciation of gold prices.

With costs spiralling, the government quietly halted fresh issuances in February 2024, a tacit admission that the scheme is unsustainable. Yet, this is merely damage limitation. A substantial portion of bonds remain outstanding, and if gold continues its upward march, redemptions will become even more painful in the years ahead.

Though gold imports have dipped from 1,013.70 tonnes in 2012-13 to 795.25 tonnes in 2023-24, this modest success comes at an unsustainable cost. India’s love affair with gold was never going to be easily curbed—certainly not with a scheme that made the government the counterparty to one of the best-performing assets of the decade.

It is said that all that glitters is not gold. The Sovereign Gold Bond scheme, once a beacon of financial ingenuity, is now a cautionary tale in policy misadventures. With no easy escape from this golden trap, the government must brace for further fiscal pain in the years ahead.

Also Read
Sovereign Gold Bonds Lose Midas Touch For Govt