Investors flock to sovereign gold bonds amid banks crises

MUMBAI: Spooked by the impact of the banking crises in the West, Indian investors flocked to sovereign gold bonds (SGBs) issued by the Reserve Bank of India (RBI) in its last tranche for FY23, taking the bonds outstanding above the 100 -tonne mark for the first time since the scheme was started in November 2015.

Personal finance experts said incremental flows from gold exchange traded funds (ETFs) to SGBs after the removal of tax and indexation benefits from debt funds effective April 1, would add to the bonds’ allure.

The latest SGB issue, which ran from 6 to 10 March, received investor subscription for 3.53 tonnes, a 22-month high, driving outstanding bond quantity to 101.57 tonnes. The outstanding value of SGBs at ₹44,937 crore as of mid-March surpassed assets under management by MF gold ETF schemes at ₹21,400 crore as of February 28, 2023. In terms of units subscribed, March’s 3.53 tonnes was the highest since May 2021’s 5.3 tonnes.

The removal of benefits applicable to gold ETFs, among other specified debt schemes from April 1, could result in incremental flows to SGBs, which are exempt from capital gains tax on redemption although interest on the bonds are taxable, according to Amol Joshi , founder PlanRupee Investment Services.

“Existing debt schemes would not be affected and neither is there any grandfathering as the new rules are effective from FY24,” Joshi said.

Since the Finance Bill amendments became public only on Friday, investor frenzy for gold bonds earlier this month was driven by bank crises in the US and EU, said bankers. They added that prospects for the metal looked bright for at least two quarters more.

“Given the current interest rate scenario, macroeconomic environment and political uncertainty abroad, gold remains one of the best asset classes to invest in, and SGB is the best medium to invest in gold if you’re in India,” said Shekhar Bhandari, president, global transaction banking, Kotak Mahindra Bank. “The prices would remain supported due to the aforesaid reasons for the next couple of quarters with a correction likely in 2024.”

The government launched the revamped SGB scheme in a bid to narrow the current account deficit and relieve pressure on the rupee. The 2.5% annual coupon, payable semi-annually, is on the issue price and tenor is 8 years though early redemption is allowed after the fifth year from the date of issue on coupon payment dates.