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Sovereign Gold Bond (SGB) Scheme

  • 18 Mar 2019

Why is it in News?

After launch of SGB Scheme in 2015, India’s Gold Imports plummeted from 968 million tonnes in 2015-16 to 780 million tonnes in 2017-18, but again rose to 955 million tonnes in 2019.

What is the SGB Scheme?

  • The SGB scheme has been launched by the Government of India to provide an alternative to buying the physical gold.
  • Under the Sovereign Gold Bond Scheme, the Reserve Bank of India issues the bonds on behalf of the Government of India.
  • Government has notified rate of interest of 2.50% per annum on SGB bonds which is payable on half yearly basis.
  • The maturity period of the bond is 8 years with an exit option in 5th year.

Minimum Subscription for SGB:

  • Minimum Subscription for an individual is 1 gram and maximum is 4kgs; for trust and other related entities the maximum subscription is 20kg.
  • Under SGB Scheme, bonds are denominated in units of one grams of gold and multiples thereof.

From where can the Bonds be purchased?

It is sold from post offices, banks, Bombay Stock Exchange, National Stock Exchange etc.

What was the need to launch the SGB Scheme?

  • This scheme aims to reduce the demand for physical gold, thereby keeping a tab on gold imports and utilizing resources effectively. Gold imports is one of the major cause of Current Account Deficit (CAD) of India, hence it is intended to plug that gap.
  • It has been observed that Gold demand rises during the time of uncertainty i.e. during the time of inflation. Therefore, the government intended to curb this demand of physical gold through this Scheme.

Why did the Demand of Physical Gold pick up again in 2019?

  • SBG can be purchased through Demat Accounts or KYC norms have to be satisfied. To avoid the unnecessary formalities, people resorted to buying physical gold itself.
  • There is lock in period for five years which is one of the other major drawback due to which people don’t prefer gold bonds.
  • On an average yearly demand of gold is 800 tonnes, with 60% demand is for jewelry during the wedding season. These needs can’t be met through SBG scheme, therefore which forms another limitation on the success of SGB Scheme due to our cultural factor.
  • Due to our cultural factor, common people trust physical gold more than paper adding on to factors why SGB scheme failed to lure the mass.

How can the People be convinced to buy the SGB instead of Physical Gold?

  • People need to be educated that annual interest on Gold Bond is more than Physcial Gold.
  • Sellers need to educate people that Gold Bond is safer than the Physical Gold as Physcial Gold suffers the risk of impurity, wear & tear too.
  • Gold Bonds are more liquid than the Physical Gold, if these features are well explained to the masses, this can change the investment pattern of the people.

Source: TH