Day 71 – Q 4. What are Sovereign Gold Bonds? What are the advantages of holding Sovereign Gold bonds in comparison with holding physical gold? How is it beneficial for the economy?
4. What are Sovereign Gold Bonds? What are the advantages of holding Sovereign Gold bonds in comparison with holding physical gold? How is it beneficial for the economy?
SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India.
Advantages compared to physical gold:
- Gold denomination – These bonds will be issued in multiple weight denominations, starting from 1 gram onwards, providing flexibility in terms of purchasing gold which suits the needs of an individual.
- Interest – Investments in this scheme are eligible to earn interest every year.
- Safety – There is no need for storage or safety of gold under this scheme, as the gold isn’t physically given to an investor immediately.
- Purity – Since it is backed by the government, one is assured of purity of gold when they invest in the scheme.
- Loan collateral – Investors can use these bonds as collateral against loans.
- Tradable – Investors can trade these bonds on stock exchanges, subject to notifications of the Reserve Bank of India.
- Cheaper- Free from making charges like in case of gold jewellery. Transaction charges are also low compared to physical gold.
- Financial benefit- Provides additional interest of 2.5% per annum and capital gains at the time of maturity are exempt from tax.
Benefits for the economy:
- Can reduce Indian’s dependence on gold imports and help narrow India’s current account deficit and trade deficit.
- Reduction in the cost of Government’s borrowings. The current borrowing cost from the domestic market is around 7-8 per cent. Thus, an interest payment below this level is an yearly saving for the Government on account of its borrowing cost.
- A decrease in the price of the gold will be a gain for the Government.
- It will reduce the demand for physical gold to some extent and thus helps in reducing the annual demand for import of gold.
- Bring the idle gold lying with Indian households into the economy
- Help government to raise finances which can be used for development purpose
- help fight the menace of black money due to strict KYC compliance.
Though the scheme offers immense benefits for the consumer as well as the economy, there are some obstacles that need to be overcome. The government must create enough awareness about the benefits as gold in India is not seen as an investment but has a social value.
Best answer: Ayush Dubey
Soverign gold bond scheme is a scheme wherein government security is issued denominated in grams of gold. Gold bonds are purchased at face value by the investor which can then be redeemed at current gold price along with interest. They are substitute for holding physical gold. These bonds are issued by RBI on behalf of GoI.
Advantages of holding gold bonds:
- Gold bonds are in dematerialized form hence they are easy to store as compared to physical gold.
- The cost associated with security and risk of keeping physical gold is also eliminated.
- No assurance related to purity has to be made which is very much required if one posess physical gold.
- it provides the same return along with interest as physical gold.
It is beneficial for the economy due to the following reasons:
- These bonds can lower the import of gold thus reducing India’s current account deficit.
- It will make Indian currency stronger thus reducing the cost of crude oil import thus reducing inflation.
- It will help in better transmission of RBI monetary policy as bonds are formal means of investment.
- It will also help fight the menace of black money due to strict KYC compliance.
- It brings an additional source of revenue which can be used to fund social welfare programme.
However sovereign gold bond scheme is not much popular due to lack of awareness and also a psychological affinity for gold possession among Indians which is regarded as a symbol of wealth. It is hence necessary to inform the public of the benefits of the scheme to make it successful.