Mint Explainer: Why RBI has allowed premature redemption of sovereign gold bonds

On 21 February, the Reserve Bank of India published a calendar for the premature redemption of sovereign gold bonds (SGB) issued between 16 October 2017 and 8 September 2020 in 34 tranches. The redemption of these bonds will be held between 16 April and 8 September.

The bonds' issue, maturity, and early redemption prices are linked to the market price of gold. The first tranche of the SGB, issued by the government on 26 November 2015, was priced at ₹2,684 per gram of gold. It was redeemed at maturity in November 2023 at ₹6,132 per gram. 

As with other bonds, the SGBs also paid investors some interest. The interest rate on gold bonds was kept lower than the savings bank rate. The government reckoned an appreciation in the price of gold would give investors enough returns. The initial interest rate was fixed at 2.75%, paid half-yearly, and reduced to 2.5% when a new tranche was issued in November 2016.

The SGB scheme was introduced with twin objectives:

One, reduce demand for investment in physical gold, reduce gold imports, and keep the country’s current account deficit in check. 

Two, mobilise low-cost funds for the government’s expenditure plans. 

These objectives have only been partly met. Gold imports have been rising, as evidenced by trade data published by the Union commerce ministry.

Besides, sovereign gold bonds turned out to be more expensive than treasury instruments that the government uses to borrow funds from the market.

The sovereign gold bonds were repayable on maturity at the end of eight years at the market price of gold. In August last year, RBI allowed investors to seek early redemption after holding the bonds for five years. 

Mint explains why the government has decided again to allow premature redemption of sovereign gold bonds.

Why redeem 34 tranches of gold bonds prematurely?

Rising gold prices mean the government will have to pay much more at redemption than was anticipated when the bonds were issued from November 2015 onwards, straining government finances. The fall in the value of the rupee due to the strengthening of the dollar in the last few years has also hurt and exerted upward pressure on domestic gold prices. 

Since the trajectory of gold prices over the next three years cannot be predicted, the government has chosen to play safe and opt for early redemption of the bonds. The upheaval caused by the new US president Donald Trump’s administration and volatile geopolitics can push gold higher.

Also read | Are sovereign gold bonds the new ‘gold standard’ in investing?

The initial tranches of bonds between 2015-16 and 2017-18 were issued at less than ₹3,000 per gram of gold. Prices of gold were relatively depressed during those years. As gold prices changed, the issue price of fresh tranches of bonds was adjusted.

In 2018-19, the bonds were issued at under ₹3,500 per gram of gold. But the price of gold crossed ₹4,000 per gram when Covid began spreading in late 2019. While the 8 September 2020 bonds were issued at ₹5,117 per gram of gold, gold prices have continued their climb and crossed ₹8,600 per gram on 25 February.

How are the issue and redemption prices of bonds determined?  

The issue price, maturity price and early redemption price of the sovereign gold bonds are linked to the market price of gold as published by India Bullion and Jewellers Association Ltd. 

The issue price is based on the simple average of the closing price of gold of 999 purity for the last three business days of the week preceding the subscription period. 

The maturity and the premature redemption value are calculated similarly for all issuance from the 10th tranche. For the earlier tranches, a simple average of the closing price of gold of 999 purity of the previous week is to be considered.

What is the government’s outstanding liability on the gold bond scheme?

Budget documents for 2025-26 estimate the central government’s liabilities at ₹55,056 crore for the next fiscal year. It was estimated at ₹68,598 crore for 2023-24 and at ₹60,566 crore for 2024-25, as per the revised estimates (down from the budget estimate of ₹84,999 crore). 

While large, the amount is a minuscule portion of the central government's liabilities. According to RBI’s annual report published in May 2024, a total of ₹72,274 crore was raised through 67 tranches of gold bonds since November 2015—equivalent to 146.96 tonnes of gold. The amount to be repaid on redemption is much larger due to the sharp rise in gold prices.

What lies ahead for the gold bond scheme?

India issued its latest tranche of sovereign gold bonds in February 2024 at ₹6,263 per gram of gold. There were no fresh issues in 2024-25 as the soaring price of gold has made the scheme an expensive proposition for the government. 

The government is unlikely to announce any more tranches. Finance minister Nirmala Sitharaman indicated as much during her post-budget media interaction on 1 February.