Gold bonds losing their shine, demand at three-year low

Gold bonds losing their shine, demand at three-year low

By Rajesh Bhayani

Sovereign gold bonds (SGBs) seem to have lost their lustre, at least in the short term, as the demand has shrunk to a three-year low.

Three SGB issues so far in FY23 garnered only 8.73 tonne. The Reserve Bank of India (RBI) will launch the last tranche of this fiscal’s SGBs in March, according to the calendar. SGBs raised the maximum during the lockdown period in FY21, followed by FY22 when bonds worth 32 tonne and 27 tonne, respectively, were sold.

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Experts say with the reopening of the jewellery shops, the demand has partially shifted towards purchase of physical gold. “During lockdown years, jewellery shops were either closed or people were not comfortable visiting the market. As a result, gold bonds saw exceptional demand,” said Debajit Saha, lead analyst (precious metals), Refinitiv, a London Stock Exchange Group (LSEG) business.

Chirag Mehta, chief investment officer, Quantum AMC, added: “Lower demand for SGBs may be on account of upward movement in the gold prices over the last few months. With prices currently at all-time highs, demand for gold has slowed down. We could see demand for gold, as well as investment gold, come back as and when prices stabilise, albeit at higher levels.”

The RBI also announced only four SGB tranches in FY23 compared to 12 and 10 in FY21 and FY22, respectively.

Shekhar Bhandari, president, Global Transaction Banking, Kotak Leadership team, said: “This should be seen from the perspective of RBI’s gold purchases for forex reserves. In 2022, the RBI added nearly 30 tonne of gold to its reserves. And to limit its exposure to gold, it may have issued fewer numbers of SGB issues.”

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However, Bhandari believes that since SGB continues to be the most effective digital gold asset instrument and since it is the asset giving the best returns, RBI is likely to introduce more tranches in the coming year.”

Mehta says that the slowdown in issuances could also be due to the cost of managing and distributing as well as the interest component that the government has to bear.

In the last seven years, since the launch of SGBs, RBI has issued 62 tranches and raised 99 tonne. Investors have the option of premature redemption after five years.

What is interesting is that despite the completion of five years for 21 issuances, premature redemption has happened for only one tonne. Gold bond investors have decided to stay for the entire tenure of 8 years. Investors can also have the option of selling these bonds on the stock exchanges, but there hasn’t been much activity there as well.

The government had launched SGBs to wean people away from buying physical gold and thus reduce imports of the metal. But annual gold imports have not seen any meaningful decline and the current account deficit, of which gold is the second largest component after oil, is currently hovering close to a decadal high of 3% of the gross domestic product.