Has government reduced SGB issuance this year? Know the loss on SGB maturity in FY25 due to custom duty reduction (2024)

The central government may consider issuing a lower quantum of Sovereign Gold Bonds (SGBs) for the financial year 2024-25 for various reasons. According to an Economic Times news report, the government plans to float Rs 18,500 crore worth of SGBs in FY 2024-25 against Rs 29,638 crore estimated in the Interim Budget 2024.

"The decision followed a reassessment of various factors, including investor demand, other investment products and uncertainties around the global economy, as the situation has changed since the interim budget in February," an official told in the ET story cited above.

What do experts say about reduction in quantum of SGB issue

There has been no announcement yet about the next issuance date of SGBs for this year, leading to speculation about the government's intent and the future of SGB issuances.

Sovereign Gold Bond 2016-17 Series I final redemption today: Investors to gain 122%; check SGB redemption price

Here is what experts say about the possibility of reduction in SGBs this year.

Aksha Kamboj, VP, India Bullion & Jewellers Association: In real terms, there is no reduction. The government has budgeted Rs 18500 crore, which is almost equal to 25 to 27 tons of gold bonds. Except for 2023-2024, the collection in SGB had always been approximately 25 tons. Hence, I feel there is no reduction in the SGB budget.

Naveen Mathur, Director - Commodities & Currencies, Anand Rathi Shares and Stock Brokers: In the current Union budget the government proposed to reduce customs duties on gold and silver from 15 per cent to 6 per cent. The lower customs duty is anticipated to decrease the demand for Sovereign Gold Bonds as after the duty cut, SGB prices on the National Stock Exchange (NSE) dropped by almost 5 per cent with SGBAUG24 falling by 2.6 per cent to Rs 7,275 per unit, while the most substantial drop was observed in SGBDEC2513, which declined by 5.98 per cent to Rs 7,550.

The original issue price of the Sovereign Gold Bond 2016-17 Series I was Rs 3,119, with an annual interest rate of 2.75 per cent. However, since the prices rose to around Rs 7,500 before budget, the government has been facing increasing cost pressures towards redemption and repayment of such bonds. Hence considering the current scenario it is highly likely the government could consider issuing a lesser number of bond issues this year.

How government's liability on SGB will be impacted?

SGB has a maturity period of eight years, so bonds issued during FY 2016-17 are due to mature this year. "In the F.Y 2024-2025 on account of redemption of SGB, as nearly 10 tons of gold bonds will mature in F.Y 2024-2025," says Aksha Kamboj, VP, India Bullion & Jewellers Association and Executive Chairperson of Aspect Global Ventures.

According to Mathur from Anand Rathi, "Since prices of gold have more than doubled since 2015, SGBs had emerged one of the most expensive borrowing instruments for the current financial year as compared to other instruments (eg. government of India paying an interest rate of around 8 % on its GOI Savings Bond maturing December 2023.) Meanwhile with strong gold investment fundamentals in place it makes a case for gold to likely to remain bullish for next few years. This may lead to increasing cost pressures on redemption which may be a likely case to reduce the number of issuances for the current year."

The total liability of the government would depend upon the prices of gold around redemption date of each series maturing this year. However, we can get a ball park figure of government's liability by assuming an average price price of Rs 7400 per gram before budget, it would come around Rs 7400 crore for 10 tonne of gold. Now, supposing the redemption price post custom duty reduction to be an average of Rs 6900 per gram the reduced liability would be around Rs 6900 core. Which is a reduction of Rs 500 crore.

What happens with SGB 2016-17 Series-I investors?

The next SGB redemption will happen on August 5, 2024, for SGB 2016-2017 Series-I. This is the final redemption of this series. The issue price of this bond was Rs 3,119. So, it's possible that the remaining investors of SGB 2016-17 Series-I may not get the inflated price of gold, as the RBI decides the redemption price based on the average of the last three business days before redemption day. If the current price is any indicator and if there is no major spike in gold prices in the next few days leading up to August 4, the likely redemption price could be around Rs 68,957 (3-day average AM price of 999 Gold at IBJ from 29-31 July).

Gold prices were hovering above Rs 73,000 for quite some days before the budget, however, they witnessed a significant fall on and after July 23, 2024. "After the import duty cut of 9% (from 15% to 6%) on budget day, gold prices fell by almost 6% from Rs 73500 to almost Rs 69000. The remaining 3% fall up to Rs 67400 was due to a fall in international gold prices from $2430 to $2350 amid profit-booking at higher levels and a stronger Dollar Index. Therefore, Gold prices in total fell by almost 9% in just two days after the budget day," says Sachin Kothari, Director of Augmont - Gold for All.

Due to both domestic and international factors, SGB investors are likely to settle for a much lower return. Had the price been Rs 73,000 per 10 gram, the compounded annual growth of capital would have been 11.22%. However, at the fallen price of Rs 68,957 the return would come down to 10.43% for these SGB investors. So net loss of annual returns on capital is likely to be 0.79%. There will no impact on the additional 2.75% interest that these SGB investors received during the entire tenure of the bond.

Experts say that the fall in price of Gold in India was due to both customs duty reduction announcement and international effect. "India being a major importer of gold, global factors play an important role in prices and demand. The base price is generally linked to the prevailing international price of gold on a day to day basis. In addition, domestic factors also play a role like festivals and marriage season demand and customs duty levied by the government. The recent reduction is majorly due to the reduction in customs duty and partially due to international prices," says Jyoti Prakash Gadia, Managing Director at Resurgent India.

What should you do if you want to invest in SGBs now?

If the government sticks to the revised target of SGB issuances, which was based on retail demand, then there may not be any material impact on the availability of SGBs this year. However, if the government decides to reduce or stop further issuance of SGBs then availability may become an issue. However, old SGBs will continue to be traded on stock exhange, so you can consider buying SGBs directly from the stock market.

"While many investors might be waiting for the new SGB issues, we have yet to see any announcement of new issues since February this year. So currently, there are no active new issues to subscribe to. And this is one of the longest gaps that we have seen in recent years between two issues. There is speculation that the government may decide not to announce new issues going forward, but that is speculation at best and no one knows anything with surety. And while it might seem tempting to buy gold now with a fall in rates via say older SGB issues available in the secondary market, one thing that has happened in recent times is that most old SGBs are trading at a premium to the current 24K gold prices. This is unlike the past when it was mostly at par or at a discount. So one needs to be careful about investing at a premium now as the premium may be eroded in the near future," says Dev Ashish, a SEBI registered investment advisor and founder of StableInvestor.