Budget 2024: Sharp dip in gold prices leaves Sovereign Gold Bond investors high and dry
Sovereign Gold Bonds (SGBs) have provided steady returns over the years, but the unexpected dip in gold prices has left investors facing lower than anticipated redemption values, highlighting the inherent risks associated with changing economic policies and market conditions.
In the budget on Tuesday, customs duty on gold has been reduced, bringing the total duty from 15% to 6%. Previously, gold and silver carried a 15% duty, split into a 10% basic customs duty and a 5% Agriculture Infrastructure Development Cess. This tax relief has led to a substantial drop in gold prices on the Multi Commodity Exchange (MCX), with prices plummeting by more than Rs 4,000 to Rs 68,900. The SGB prices also saw a decline on the National Stock Exchange (NSE) by 2%-5%. For example, SGBAUG24 was down by 2.6% at Rs 7,275 per unit. The highest dip was seen in SGBDEC2513 with a 5.98% decline at Rs 7,550.
Investors who participated in the Sovereign Gold Bond Scheme 2016-17 – Series I, issued on August 5, 2016, are nearing their final redemption, which is set for the first week of August 2024. Unfortunately, the recent cut in customs duty on gold may put a damper on their returns. The original issue price of Sovereign Gold Bond 2016-17 – Series I was Rs 3,119, with an annual interest rate of 2.75 percent, paid in semi-annual installments. The final installment, along with the principal, is due upon maturity. The redemption price of SGBs is calculated using the average closing price of 999 purity gold as published by the India Bullion and Jewellers Association Limited (IBJA) for the three business days preceding the redemption date.
SGBs, first floated in November 2015, are government securities denominated in grams of gold. They were introduced as substitutes for physical gold. Investors pay the issue price, and the bonds get redeemed on maturity. They also pay a fixed interest rate of 2.5% per annum. The bond is issued by the Reserve Bank of India (RBI) on behalf of the Government of India. They are also listed on the stock exchange. With an eight-year tenure, SGBs offer an early exit option in the 5th, 6th, and 7th years on interest payment dates. Investors seeking premature redemption need to approach the concerned bank or post office at least one day before the coupon payment date.
The RBI earlier announced the redemption date and price for the SGB Scheme 2016-II on March 22, 2024. For the SGB 2016 Series II tranche issued on March 29, 2016, the final redemption date was set for March 28, 2024. It was offered at an initial issue price of Rs 2,916 per gram and redeemed at Rs 6,601, which will yield around a 126% gain for investors upon maturity.
Source: https://www.businesstoday.in