Worried about the less than enthusiastic response to recent tranches of its Sovereign Gold Bond (SGB) scheme, the Centre is now proposing several tweaks to attract new investors. The purchase of SGBs by individuals, which was earlier subject to a cap of 500 grams (of gold-denominated bonds), has been relaxed to a generous 4 kg a year. Trusts have been allowed to buy SGBs equating to 20 KG. Modalities are being worked out to offer SGBs on tap instead of in a limited window offer period, with the finance ministry reportedly considering different rates and tenures. With these changes, it is hoped that SGB issues will get closer to their target mobilisations of ₹10,000 crore to ₹15,000 crore a year, and temper the gold import bill.

Some of these changes will render the scheme more investor-friendly. The brief offer periods for the SGBs made it difficult for investors to scrounge up the funds to apply for them. Indian consumers are also used to timing their purchases to low points in gold prices. Making these bonds available on tap may well induce more consumers to turn to them in place of physical gold, especially as these bonds also pay an annual interest and help skip storage costs. But having said this, as the Centre readies to hard-sell the scheme, it needs to keep in mind the long-term downsides as well. For one, these bonds only defer physical gold demand and do not really reduce it. Given that SGBs are a substitute for physical gold and promise to mirror gold prices over their holding period, bondholders may eventually look to deploy their maturity proceeds in physical gold. Two, the perception that SGBs represent inexpensive borrowings for the Centre given their low interest outgo of 2.5 per cent is flawed, as this doesn’t factor in gold price risks. At maturity, the government of the day will have to fulfil its commitment to SGB holders by delivering gold-linked returns. To meet these commitments, all SGB issues may need to be backed either by physical gold holdings or forward contracts, entailing additional costs. In the absence of such safeguards, government liabilities can swell if gold prices appreciate steadily in the next few years. Recent benign trends in gold prices shouldn’t lull the Centre into a false sense of complacency about such risks. One way to contain this is for the Centre to also offer ‘on tap’ buyback of these bonds before the 5-year lock-in period. This will also improve liquidity, making the bonds more attractive to investors.

For India to structurally moderate its gold imports, however, the gold monetisation scheme, which was designed to nudge households to trade in their hoard of gold, needs to take off. Given estimates that domestic savers have over 20,000 tonnes of unproductive gold stashed away, it is the gold monetisation scheme that is urgently deserving of both promotional efforts and tweaks to enhance its appeal.