Back in 2015, the Indian government launched the Sovereign Gold Bond (SGB) scheme with a clear goal—reduce India’s dependence on physical gold and offer investors a smarter, paper-based alternative. The idea was simple: instead of buying gold jewelry or bars, people could invest in bonds backed by the government, earn a fixed 2.5% annual interest, and cash out at the prevailing gold prices after eight years.
It seemed like a win-win at the time. But over the years, what started as a promising policy has turned into a financial headache for the government—while becoming an unexpected goldmine for investors.
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How the Government Miscalculated
The logic behind SGBs was sound: gold imports were draining India’s foreign exchange reserves, so offering a digital gold alternative made sense. Investors loved it—government backing, tax-free capital gains, and the potential for gold price appreciation made SGBs an attractive deal.
But the government underestimated one crucial thing: gold prices don’t stay still.
As one post on X put it, SGBs were “a miscalculated bet on gold price stability.” Unlike traditional bonds backed by assets or reserves, SGBs weren’t backed by actual gold—they were simply government promises tied to a commodity the government had no control over.
And then, gold prices skyrocketed.
Take the 2016-17 Series III bonds, for example. Investors who bought in at Rs 3,119 per gram are set to redeem them in November 2024 at Rs 7,788—a massive 159% profit. Add the 2.5% annual interest, and their total returns exceed 11% per year—beating inflation and outperforming most fixed-income investments.
For the government, this translated into mounting liabilities. The total outstanding SGBs as of recent reports stood at Rs 72,274 crore (146.96 tonnes of gold), and estimates suggest the government’s cost—including the waived capital gains tax—has ballooned to around Rs 38,700 crore.
Policy Blunders and Investor Backlash
The problem didn’t end there. In July 2024, the government cut gold import duties, causing a sudden 4-5% drop in domestic gold prices. Many SGB investors, expecting steady gains, felt blindsided. X was flooded with posts calling it “a betrayal” and a “huge blow” to small investors who had trusted the scheme.
Then came the final nail in the coffin: during the 2025 Budget, Finance Minister Nirmala Sitharaman announced that the SGB scheme would be discontinued. The reason? The government had realized that paying 9-11% returns annually on these bonds was simply unsustainable.
A Dream Deal for Investors
While the government scrambles to contain the fallout, SGB holders are celebrating.
Thanks to the unique structure of SGBs—where redemption is linked to gold prices and interest is paid semi-annually—investors have enjoyed the rare benefit of both safety and high returns.
Even after new issuances stopped in February 2023, demand for SGBs in the secondary market surged. With no fresh supply, existing bonds listed on the NSE and BSE have been trading at a premium. As Zerodha Varsity pointed out, speculation around discontinuation only increased investor interest.
Plus, SGBs offer early redemption after five years, making them even more attractive. The RBI’s February 2025 announcement of early redemption prices (e.g., Rs 8,499 per gram for 2019-20 Series IX) meant investors could cash out at peak gold prices. No wonder some X users called it “a boon for investors”—even as it became “a financial sinkhole for the government.”
Lessons from the SGB Experiment
The SGB saga is a classic case of misaligned incentives. What started as a way to control gold imports ended up costing the government more than expected—all while making investors rich.
Many experts and commentators now see SGBs as a lesson in risk management. As one X user put it, “This is what happens when you tie government finances to an uncontrollable commodity.”
For investors, however, SGBs were a golden opportunity. Those who got in early struck gold—literally. Even now, secondary market trading keeps the bonds valuable. As another user summed it up:
“At the end of the day, the government will cover its losses with taxpayer money—just like always.”
The SGB scheme may have run its course, but for those who took the bet, it remains a perfect example of how sometimes, the best investments come from unexpected places.
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