Sovereign gold bonds (SGBs) were introduced in the country in FY16 against the backdrop of a forex crisis, which was fuelled partly by high gold imports. The idea of SGB is simple. If people wish to hold gold as investors, the same can be provided through SGBs, which do not entail any physical import of gold. This way there would be a reduction in gold demand as the same advantage accrues to the buyer of the bond.
- Bonds are sold through offices or branches of Nationalised Banks, Scheduled Private Banks, Scheduled Foreign Banks, designated Post Offices, Stock Holding Corporation of India Ltd. (SHCIL) and the authorised stock exchanges either directly or through their agents.
- This was topped with an assured return of 2.5 per cent on the principal, besides capital gain that would be driven by market forces over a period of time. The underlying premise was that people bought gold as it is considered to be a safe investment as the price of gold normally appreciates in the medium term.The SGB, which was denominated in rupees.
- It directly linked to the domestic price, would not involve physical handling, storage or insurance cost.
- More importantly, the bond is issued by the sovereign and carries zero risk of default.Since the bonds are backed by the government, there is no risk of default in the repayment of the bonds .
- Logically this was a perfect product to steer people away from buying gold for investment purposes.