Sovereign Gold Bond Redemptions Yield Substantial Returns Exceeding 200 Percent
Sovereign Gold Bond Redemptions Accelerate as Investors Benefit from Multi-Fold Returns
A series of sovereign gold bond (SGB) redemptions is taking place this week, as the Reserve Bank of India (RBI) has made these bonds eligible for premature exits. The SGB 2020-21 Series-VII-Issue and the SGB 2018-19 Series-II-Issue are now eligible for redemption for investors.
Sovereign gold bonds are instruments issued by the central bank on behalf of the government of India, typically with an eight-year tenure and an exit option usually available after five years. The redemption prices for early exit are calculated based on the simple average of the closing price of gold of 999 purity of the previous three business days from the date of redemption.
The RBI discontinued the SGB scheme from 2024, deeming it an expensive method of borrowing for the government. In the last two fiscal years, no fresh issue of SGBs has occurred, with no announcements from the RBI regarding FY27.
The RBI's decision to allow premature redemption of SGBs has led to a surge in redemptions, with the first wave starting in February and accelerating in April. Two SGB redemptions were announced this week, with two more slated for next week, including the 2020–21 Series I and the 2019–20 Series VI.
Investors are increasingly interested in the returns offered by SGBs. For example, the SGB 2020-21 Series-VII has a redemption price of Rs 15,554 per unit, compared to the issue price of Rs 5,051. This represents a discount of Rs 50 for online subscriptions.
In percentage terms, the absolute return on this set of SGBs is over threefold, or a tad above 200 percent. This calculation does not take into account the 2.5 percent interest that has to be paid on the bond.
The reasons behind this enormous return lie in the significant jump in gold prices since 2020. Gold is seen as a safe-haven asset, and SGBs are linked to the market price of gold. As a result, redemption prices have increased in tandem with gold prices.
Many of these bonds, issued when gold prices were lower, are now yielding multi-fold gains. "The gold prices have exponentially moved higher in at least the last five years, prompting the RBI to give an early exit for investors," said Dilip Parmar, a research analyst with HDFC Securities.
| SGB Issue | Issue Price | Redemption Price | Discount |
|---|---|---|---|
| SGB 2020-21 Series-VII | Rs 5,051 | Rs 15,554 | Rs 50 |
More tranches may become eligible for premature redemption through FY27, suggesting that this current trend is likely to continue.
Investor Takeaway
Investors should be cautious of the discontinuation of sovereign gold bonds as an expensive method of borrowing for the government.
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