FinMin, RBI to decide on borrowing for Oct-March this week; take a call on Sovereign Gold Bond
Sun Sep 22 2024
The Finance Ministry and Reserve Bank of India will take a call on the fate of Sovereign Gold Bonds (SGB) during the week, starting September 23. As of now, there is very distinct possibility of a fresh issuance of SGB during the current fiscal. The meeting will decide market borrowing for second half of the current fiscal starting October 1.
The last tranche of SGB (FY 2023-24 Series IV) was issued on February 21. The aggregate sum raised during 2023-24 amounted to ₹27,031 crore (44.34 tonne). Since the inception of the SGB scheme in November 2015, a total of ₹ 72,274 crore (146.96 tonne) has been raised through 67 tranches.
Dip in SGB issues
Officials have maintained that SGB has been one of the most expensive tools to bridge fiscal deficit. This is one of the key reasons that a number of issues are coming down. In FY21, there were 12 issuances, which came down to 4 in FY24. However, there has not been a single issue this fiscal. “This is not a social security scheme. Any decision of fresh issuance will be based on the assumption that it should not just benefit the customer, but the government too,” an official said on the condition of anonymity.
The spotlight on SGB came after the government lowered import duty on gold to 6 per cent from 15 per cent, making physical gold purchases more attractive than investments in SGB. At the same time, the second-year issuance of SGB is nearing redemption, and the expectation is that the government will have to bear higher outgo as gold prices have almost doubled in the last 8 years. In fact, the RBI has already announced premature redemption of 30 tranches (issued between May 2017 and March 2020) to take place between October 1 and March 31, next year.
SGB was introduced to bring down the physical import of gold and the consequent reduction in the current account deficit. Known as paper gold or e-gold, this bond is denominated in multiples of gram(s) of gold with a basic unit of 1 gram. The tenor of the SGB is 8 years with an exit option in the 5th, 6th and 7th year, to be exercised on the interest payment dates. While the minimum permissible investment is 1 gram, the maximum is 4 kg. The investor receives an interest of 2.50 per cent per annum payable, semi-annually, on the nominal value.
While the interest on gold bonds shall be taxable, capital gains tax on the redemption of SGBs for individuals has been exempted. The redemption price will be in Indian rupees based on the simple average of the closing price of gold of 999 purity of the previous 3 working days, published by IBJA.
Market borrowing
The meeting between Finance Ministry and RBI might see lower borrowing during the second half. There are two reasons: First, while the interim Budget had a market borrowing target of ₹14.13 lakh crore, the final borrowing was cut to ₹14.01 lakh crore. For the first half, borrowing was pegged at ₹7.50 lakh crore. So, second-half borrowing could be ₹6.51 lakh crore. However, the final number may be less as tax collection has been good, while expenditure is low.
The outcome of the borrowing meeting will be known by month end, the official said.
Source: https://www.thehindubusinessline.com