While equities have been sliding since late 2024, gold has been on a tear. The run-up in gold prices means the union government faces a much higher liability on payouts in its sovereign gold bond (SGB) scheme, which was introduced in 2015 and raised funds in 67 tranches. SGBs have a tenure of eight years. They are issued and redeemed at the prevailing gold price and pay interest of 2.5-2.75% a year, which is taxed. But capital gains on redemption is tax-free.
Gold and equity prices had broadly been in sync since 2015. Until September 2024, equity prices, as measured by the Nifty 50 Total Share Index, had increased about 3.3 times since 2015. By comparison, gold delivered 3-fold returns. But in the past few months, equity markets have fallen sharply while gold has continued to rise. Compared to their 2015 values, gold prices had cumulatively risen by 3.46 times by early March, against 2.85 times for equities.
In general, returns on the various tranches of SGBs have compared well with Nifty 50 index returns. The first eight SGB tranches trailed equity returns. But of the subsequent 28 tranches that have completed at least five years—the effective lock-in period of SGBs—as many as 23 have bettered equity returns in pre-tax terms. And since capital gains on SGBs are tax-free, this outperformance also extends to post-tax returns.
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Advantage equities
The analysis so far is since 2015. How would a buy-and-hold strategy of gold versus the Nifty 50 fare over an even longer time period? We took all months since 1995, and computed five-year and eight-year returns for both a Nifty 50 and gold investment made in each of those months, using the monthly average index or prices of each of these assets.
Over a five-year period, Nifty 50 beat gold by over 1 percentage point in about half the months, while in 37% of the months, gold beat the Nifty 50 by over 1 percentage point. In the remaining 13% of the months, outperformance was within 1 percentage point on either side. Over an eight-year period, the number of months in which the Nifty 50 tops gold by over 1 percentage point increases even more (55% versus 36%). The superiority of equity is likely to increase further if we add returns from dividends or assume they are reinvested in the Nifty 50.
Staying invested
Of the 67 tranches of SGBs, seven of the earliest series have been redeemed so far. While the bonds have a tenure of eight years, investors have the option to redeem them after five years at the prevailing market rate. Interestingly, most investors have chosen not to redeem their bonds prematurely.
Of the 30 tranches that are yet to mature but eligible to be redeemed early, redemption rates are in single digits; 20 of these tranches had redemption rates below 5% as of August 2024. One reason could be the complicated redemption process, which involves submitting requests for premature redemption at least 10 days before the redemption date, along with identity documents.
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Starting later this month, another 14 tranches will mature fully by December. According to data available, the amount eligible for redemption under these bonds, after accounting for redemptions as of August 2024, is equivalent to around 7,786 kg of gold.
Government liabilities
Larger redemptions are scheduled for later this decade. Assuming no premature redemptions under any of the tranches, the equivalent of 25,000 kg of gold is expected to be redeemed in 2028 and 35,000 kg in 2031. Between 2025 and 2032, the government has to redeem the equivalent of 132,000 kg of gold under just the SGB scheme. For context, India’s gold reserves are around ₹6.5 trillion, equivalent to about 760,000 kg of gold.
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The government also has liabilities under the gold monetisation scheme, in which individuals can deposit gold with banks, earn interest and redeem their holdings at the prevailing market price. Both have risen sharply. Between 2017-18 and 2023-24, the government paid out a total of ₹2.39 trillion under these two schemes. For 2024-25 and 2025-26, another ₹1.4 trillion has been budgeted. If gold prices keep rising, expect such liabilities to rise sharply over the next decade or so.
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