With cost financing fiscal deficit through sovereign gold bonds (SGBs) reaching unsustainable levels, the Centre will take a call on whether to go for fresh issuance of SGBs in end-September, as outlined in the Budget.
The move is also in the wake of the sharp customs duty reduction in the Budget, which made the policy of discouraging physical gold holding, and imports redundant, sources said.
In the Budget presented on July 23, the government lowered the gross SGB issuances to Rs 18,500 crore from Rs 29,638 crore in the interim budget presented on February 1. Net borrowing through SGBs has been slashed to Rs 15,000 crore from Rs 26,138 crore estimated earlier. The Centre’s gross and net borrowings via SGBs were Rs 26,852 crore and Rs 25,352 crore respectively in FY24, as per the revised estimate.
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“It is one of the most expensive instruments to fund the fiscal deficit,” an official said, adding that a call will be taken in September on whether fresh issuances this year would be necessary. This would also be keeping in mind the fact that the policy should benefit both the investors and the government.
“On whether we would like to continue (the SGBs) or not, a holistic decision has to be taken going forward. It is not a social security scheme,” the official said.
The Centre finances its fiscal deficit with several instruments including dated securities, national small savings fund (NSSF), provident funds and other tools including sovereign gold bonds.
The Centre’s cost of borrowing through dated securities is 7-8% over a period of time and up to 8.2% through various NSSF schemes whereas the cost of borrowing the SGBs is around 13.75% for the Sovereign Gold Bond 2016-17 Series I maturing later this week (going by the current price of gold).
The original issue price of the SGB 2016-17 Series I was Rs 3,119/gram, with an annual interest rate of 2.75%. Now, the gold price is ruling at Rs 7,190/gram. If the price holds, the redemption of the bond on August 5 would give a CAGR return of 11% to investors. Additionally, the investors are getting 2.75% interest per annum on the bond.
After the import duty was cut to 6% from 15% in the latest Budget, domestic gold prices fell from Rs 7350/gram to about Rs 6900, a decline of 6%. The duty cut was aimed at lowering input costs, reducing gold smuggling, stimulating domestic manufacturing and boosting exports.
“SGBs were brought in as an investment (instrument) with a specific objective of curtailing imports of gold holdings. But now that we have reduced the duty, we’ll see how to go about it,” the official said, adding that the high gold price was not due to customs duties but due to geopolitical issues. Come from Sports betting site VPbet
On sovereign green bonds, the official said the government will proceed with the plan to issue papers worth around Rs 20,000 crore in the current financial year. However, it will keep a watch on greeniums (premiums by way a lower cost of borrowing for the governemnt) as it was disappointed with the premium of 1-2 basis points the previous year.
