The Indian government faces mounting financial pressure from its Sovereign Gold Bond (SGB) scheme. As gold prices reach record highs, the liability to bondholders has ballooned to approximately ₹1.2 lakh crore. This represents a significant fiscal challenge that could impact government finances in the coming years.
Since its inception, the government has issued 67 tranches of SGBs equivalent to 146.96 tonnes of gold. Currently, 130 tonnes remain outstanding with an issue-price value of ₹67,322 crore. However, the actual redemption cost has nearly doubled due to gold price appreciation.
SGBs offer investors an alternative to physical gold with additional benefits of fixed interest and capital gains potential. Each bond has an 8-year maturity period with an option for early redemption after 5 years.
The table below gives a clear overview of how much the current market value is compared to the original liability:
| Aspect | Original Value | Current Value (April 2025 |
| Outstanding Gold | Weight130 tonnes | 130 tonnes |
| Issue Price Liability | ₹67,322 crore | ₹67,322 crore |
| Market Value Liability | – | ₹1.2 lakh crore |
| Gold Price | Various Issue Prices | ₹9,284 per gram |
| Gap | – | ~₹52,678 crore |
The widening gap here indicates that much more will need to be redeemed on the part of the government since it is required to surrender from bondholders over and above the amounts collected initially.
In addition to the principal value that has to be redeemed, the government pays:
The first tranche of SGBs is already maturing. For example, SGB 2016-17 Series I saw redemption price set at ₹6,938 per gram in August 2024, compared to its issue price of ₹3,119. This means that investors would wait to be rewarded by over 120% returns, while on the other hand, it becomes a huge payout for the government.
With time, several mature bonds will create continuous pressure on government finances due to redemption.
SGBs pose a fairly interesting situation. What benefits the investors in this unique situation in terms of bondholder rights directly increases the government's liability in an equal amount. Every increase in gold price makes redemption costlier for the government but benefits the bondholders.
SGB capital gains are tax free. In fact, it makes SGBs more attractive than physical gold, where gains have to pay taxes, so it's a win-win for investors and the government gets increased exposure.
Gold historically has served as a hedge against inflation and economic uncertainty. Recent situations in the global economy have pushed the gold prices to unprecedented levels. This price of ₹9,284 per gram represents a considerable increase over average issue prices of earlier SGB tranches.
Market analysts are expecting that gold prices will continue to remain strong in the near future. This will, in turn, widen the gap by which payments will need to be redeemed.
The government has very tough choices in dealing with this expanding liability. The government has to maintain the balance between its bond-holding endeavor and fiscal stability. Possible options include:
Growing liability will pose some tough financial questions. SGBs have already succeeded in diverting household investment in gold from the physical form to financial instruments, reducing and freeing up space in gold imports. This will support India's balance of payments.
The government will now have to negotiate the redemption phase of this policy initiative while continuing to maintain the necessary public confidence in sovereign instruments.