According to Reserve Bank of India data, investors have encashed just around half a tonne out of SGBs against 14.7 tonnes eligible for premature redemption, at a time gold prices are close to record levels.
Market experts said investors are reluctant to redeem these bonds since they believe that the prices will hit the ₹1 lakh per 10 gm mark due to global trade war unleashed by US President Donald Trump and the ongoing wars in the Middle East and Europe.
“There is a strong belief among investors that the price, driven by global factors, will hit the ₹1 lakh mark, so they are holding on despite making sweet returns,” said Surendra Mehta, national secretary of the India Bullion and Jewellers Association (IBJA), whose rates the central bank uses to price the bonds.
The bonds first issued in November 2015 have a tenure of eight years; however, investors are free to cash out after five years. Currently, bonds issued between 12 May 2017 and 11 March 2020 are eligible for premature redemption.
The average price of outstanding bonds issued between 12 May 2017 and 21 February 2024 stands at ₹4,183 per gramme, showed the RBI data. The three-day average closing price of 99.9% purity gold was ₹8,844 per gm as of Friday.
Mehta, a chartered account by profession, expects gold to rise by another 5% in the medium term; however, he adds that to hold on for three more years “might not be expedient”.
“My advice to investors is to take the killing and put the proceeds into a fixed deposit whereby you can earn a higher 7-8% per annum (than the coupon of 2.5% per annum) for the next three years instead of waiting three years more where nobody can tell whether prices would continue rising,” he said, adding that “investors weren’t giving this a serious thought”.
Apart from capital appreciation, investors earn a 2.5% interest per annum on the issue price. This is a big draw, providing an offsetting feature against a decline in gold prices.
The government liability
From the government’s point of view, the rise in gold prices has increased the liability on the outstanding bonds. But the RBI has been buying gold as an attempt to diversify its official reserves, offering some kind of a “natural hedge” to the SGB liability, according to Shekhar Bhandari, president and business head, Kotak Mahindra Bank.
Against bonds worth ₹54,427 crore raised by the government, its unrealized liability on the outstanding bonds stands at ₹1.15 trillion on the principal alone, based on a rough calculation using average prices.
However, the RBI has been increasing its gold reserves consistently in the past eight years, according to data from miner’s lobby World Gold Council (WGC).
India holds 879 tonnes of gold as of January 2025, which translates into 12.4% of reserves. Over eight years, it has increased its gold reserves by 321 tonnes, according to WGC.
To be sure, the liability on outstanding bonds will lessen in case the prices decline from here—if the wars end or the US tariffs don’t impact the global economy in an adverse way, said James Jose, managing director, CGR Metalloys Pvt. Ltd, a large Kochi-based bullion refiner with an installed capacity of 500 kg per day.
“Investors are likely to hold on to their bonds amid extant geopolitical and global trade concerns,” said financial planner Amol Joshi of PlanRupee Investment Services.
Better-than-equities returns
Those who invested in 2017-18 are sitting on returns surpassing those from equity markets. For instance, bond holders were issued SGBs at a price of ₹2,951 per gm on 12 May 2017. With the average IBJA price at ₹8,844, that translates into an annualized return of 14.71%.
Against this, the Nifty Total Returns Index, which accounts for the index constituents’ stock price movements and dividends, has given 13.4% annualized returns over the same period, from a beginning value of 12,715 to a closing value of 34,802.3 on Friday.
SGBs were first issued by the present government on 30 November 2015 right through 21 February 2024 to wean residents away from buying physical gold, seen as a dead asset, and curb the burgeoning current account deficit and pressure on rupee through gold imports.
Since the discontinuation of issuance in February 2024, investors have shifted to gold ETFs, whose net assets under management have almost doubled from ₹28,530 crore as of 29 February 2024 to ₹55,677 crore as of last month.
