The Sovereign Gold Bond Program: A $13 Billion Liability for India
India’s sovereign gold bond program has developed into a $13 billion liability for the government due to soaring gold prices, leaving taxpayers responsible for redemption costs. Originally designed to stabilize gold demand, the initiative has failed as import levels and bond obligations continue to rise, and the government has ceased new issuances amidst financial turmoil.
India’s sovereign gold bond program has transitioned into a $13 billion naked short position for the government. With increasing bullion prices, taxpayers face significant liabilities. Originally, the program aimed to offer a 2.75% coupon, but modifications later reduced it to 2.5%. Upon redemption, bondholders were meant to receive the gold’s current market value in rupees.
The program’s foundation rested on several assumptions, including a decreased demand for gold following the eurozone crisis. However, these expectations faltered as international gold prices skyrocketed from $1,500 to $3,000 an ounce since late 2019, resulting in substantial borrowing costs for the government. Additionally, despite elevated prices, average gold imports have remained high, with expenditures reaching $37 billion annually over the past decade.
Attempting to control demand, the Indian government raised customs duties on gold to 15% in 2022, which paradoxically increased domestic prices, thus exacerbating their financial obligations on maturing bonds. A subsequent rollback of these tariffs to 6% occurred just before the US elections due to rising inflation concerns.
Recently, a bond initially sold in 2017 was redeemed at over 8,600 rupees, equivalent to triple its issue price. While investors have benefitted significantly, taxpayers are left bearing the burden of a continued bond liability of 132 tons, amounting to approximately 1.2 trillion rupees ($13 billion). The final tranche of these bonds is scheduled for retirement in February 2032.
Analysts express concern about potentially mounting losses in the event of sustained high market prices. Although the Reserve Bank of India holds considerable gold assets, these were not acquired to offset the government’s liabilities, potentially raising questions about the institution’s independence amid mounting debts.
Currently, the Indian government has halted new bond issuances, having collected 270 billion rupees during the last fiscal year—the highest in the program’s history. The cultural significance of gold in India remains strong, making it a cornerstone in many families’ financial security. Despite the government’s efforts to curb gold hoarding, the recent unhedged position represents a perilous gamble against a deep-rooted cultural instinct.
The Indian sovereign gold bond program, initially perceived as a prudent investment, has morphed into a substantial liability for taxpayers due to soaring gold prices. The government’s efforts to mitigate the demand for gold have backfired, leading to increased costs and financial exposure. With the suspension of new bond issuances, the financial repercussions of earlier decisions loom large, underscoring the cultural attachment to gold as a key asset in India.
Original Source: m.economictimes.com
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