How much will government lose in the Gold Bond scheme?

23 Oct 2025 , 01:37 PM

SGB IS NOW A BIG WORRY FOR THE GOVERNMENT

Imagine that you had sold a call option on gold and each time the price of gold went up, you kept adding to your positions. Your bet was that gold will eventually face mean reversion and come down, but it seems to be defying gravity. That is the situation the government of India finds itself in the issue of sovereign gold bonds (SGB). Since the first gold bonds were issue by the government in late 2015, the price of gold is up nearly 5 times. Here is a quick recap of the factors that led to one of the biggest rallies in gold in recent years.

When RBI started issuing gold bonds in late 2015, the price was around ₹25,000/10 grams. Today, it is about ₹1,29,000/10 grams. There were several reasons for the rally. Central banks are buying gold as an alternative to the dollar. Today, central banks hold more gold than Euro as reserve currency. De-dollarization was another factor that spurred gold, which is not surprising with US fiscal deficit closer to 8% of GDP. Above all, ETFs saw huge inflows into gold funds and gold ETFs, and needed physical gold to back them up.

Till February 2024, the Indian government continued to issue sovereign gold bonds (SGB) before it finally called a halt to fresh issues. However, there is an overhang of a huge outstanding liability on these gold bonds. The central government has not only guaranteed the 2.5% interest payment; but also, redemption of equivalent grams of gold at the prevailing market price. This sovereign guarantee has put immense pressure on the Indian government. Let us for understand the contours of the SGBs issued by the government.

CONTOURS OF SGB ISSUED BY THE GOVERNMENT

The table below captures a snapshot of 67 tranches of sovereign government bonds issued, redeemed, and outstanding at the current juncture.

Particulars	SGBs in grams	SGBs in tonnes
SGBs issued	14,69,61,349 grams	146.961 Tonnes
SGBs Fully Redeemed	2,09,33,333 grams	20.933 Tonnes
SGBs Partially Redeemed	3,72,807 grams	0.373 Tonnes
SGBs Outstanding as of Date	12,56,55,209 grams	125.655 Tonnes

Data Source: RBI

As can be seen from the above table; out of the 146.961 tonnes of SGBs issued till date across 67 tranches, full redemption of only 20.933 tonnes has happened. The government has announced aggressive premature redemption plans, but despite the best efforts of the government, only 0.373 tonnes of premature redemptions have happened.

Evidently, investors are opting to hold the SGBs for the full 8-year tenure as it will make their long-term capital gains fully tax free. Of course, this also means that investors continue to be bullish on the price of gold. The result is that the government still has a massive outstanding SGB liability worth 125.655 tonnes yet to be redeemed at the relevant market prices. That is the big concern, especially amidst the frenetic rally in the price of gold.

HOW MUCH IS THE GOVERNMENT LOSING ON THE SGB SCHEME?

There is some amount the government has already lost through partial redemptions and through full redemptions at a premium. But that is the much smaller part of the story. The bigger story is the potential loss on the outstanding SGBs. Here is the full story in numbers.

Particulars	Amount
Loss on Full Redemptions of SGBs till date	₹10,025 Crore
Loss on Partial Redemption of SGBs till date	₹305 Crore
MTM Loss on Partly Unredeemed Portion of SGBs #	₹24,281 Crore
MTM Loss on Fully Unredeemed Portion of SGBs #	₹67,659 Crore
Incurred and MTM Capital Loss on SGBs as of Date	₹1,02,270 Crore
Total Interest Cost incurred over 8 years	₹14,455 Crore
LTCG tax loss due to 8-year exemption @12.5%	₹12,816 Crore
Effective loss to government on SGBs as on Date	₹1,29,541 Crore

Data Source: RBI (# – last SGB Redemption price of ₹12,567/gram assumed)

Here the assumption is that the gold price does not rally much higher from here. For the unredeemed portion, we have used the last redemption price of ₹12,567 per gram as the benchmark. If you add the notional capital loss at current prices, interest cost, and the tax forfeited, the total loss to the government will be to the tune of ₹1,29,541 Crore. That is assuming that prices do not go up sharply from here.

Of course, if prices of gold come down, then the government could gain marginally on that front. However, should the price of gold go up further by another 20% to 25% (as projected by Goldman Sachs), then the losses could really mount for the Indian government. For now, it is more a hope that gold prices do not rally too hard from here on.