SGBs seem to be a great way to invest in gold. Absence of making charges, GST, wastages and taxes on capital gains make it the best in my opinion.
The additional 2.5% interest have make me think whether SGBs are “too good to be true”. However, since it is backed by the RBI, I know it fully risk free and backed by the state.
This has however made me think how the government makes money on our gold (it also allows us to buy at a discount, which raises more questions in my head).
SGBs do not allow us to convert the bond to physical gold (which is fine with me). Since we can’t convert these bonds to physical gold like those digital gold investment apps, does the RBI even buy the gold physically, or is it just a bond pegged to the current gold prices. Are we just lending money to the government at a variable interest rate?
What made the government feel the need to give an additional 2.5%, when not doing it would also have made SGBs more attractive than all other gold investment options (on a purely investment note and ignoring the fact that you can’t wear SGBs to your cousin’s wedding ). Is it losing money on every SGB bond?
I couldn’t find much on why the government issues SGBs on this forum, Varsity or the internet. Anyone who is informed in these topics?
Reducing Physical Gold Demand: One of the primary reasons is to reduce the physical demand for gold. High imports of gold affect the country’s current account deficit. 2.5% interest rate is a cost the government is willing to bear for the broader benefits of reduced gold imports.
This is a good move to make your currency strong!
Gold Reserve: The government doesn’t necessarily buy physical gold for each bond issued. SGBs are more like debt instruments pegged to the price of gold, allowing the government to use the funds for other developmental purposes.
I think sgb is a perpetual thing.
Govt will issue new ones and fund the existing one.
Main issue will arise when demand reduces for primary issue and existing ones are matured AND govt don’t have money to repay.
Gold is used as a hedge against inflation and has survived multiple centuries.
Sgb is good as long as there is no sovereign default.
By having a option for pin-pointed tweaking of the Indian economy as desired,
by reducing the demand for physical gold whenever necessary,
by issuing a new tranche/series of SGBs.
This was also discussed recently in this topic-thread.
Such a scenario is an actual risk for typical debt (eg. corporate bonds).
For example, if long-term debt is refinanced periodically by short-term debt - Duration gap - Wikipedia
This is NOT an issue in case of sovereign debt (eg. GSECs, Tbills ,SGBs),
as RBI can always choose to “print money” and fulfill its debts.
By doing so, the impact on us will be in the form of devaluing the currency (INR) and NOT in the form of failure to receive the interest due or receive the principal upon maturity.
Govt collects money (loan from public) through many modes and this is one of the ways. As the scheme is good and will remain continued so Govt would be able to raise more money in future through these bonds and repay to the earlier investors.
It is almost like PPF scheme where Govt is giving about 7% interest and that is also tax free.
If Gold prices increase the price of these bonds would also increase and cost of bonds to Govt would also be high. Anyway government wants money through tax collections as well as through public loans.
). Is it losing money on every SGB bond?