Over 67 tranches since late 2015, Indian government issued 146.96 tonnes worth of gold bonds (1 tonnes – 1,000 KG). Of these, the total redemptions including the final redemptions and premature redemptions have been 21.31 tonnes. That means; there is still about 125.65 tonnes of gold bonds still waiting to be redeemed over the next 6 years. Gold prices have gone ups sharply and that poses a major problem since the center has also given a sovereign guarantee. 

In the last few months, the government has tried to urge people to redeem the SGBs early, but response is limited. For one, people expect prices to go up more and also premature redemption would mean they lose on tax exemption. As of date, outstanding SGBs at 125.65 tons have a buy value of ₹65,995 crore. That is what the government has raised as SGB collections from these bonds. If these bonds were to be redeemed today at the latest announced price of ͅ₹12,567 per gram, it translates into total liability of ₹1,57,911 crore for the government. Clearly, the gap of ₹91,916 crore has to borne by the government from its funds. 

The amount of ₹91,916 is just actual loss that the center has to bear. There is more  to it. Firstly, if gold prices go up further, as projected by Goldman Sachs and others, or if the rupee weakens, then the government liability goes up. Secondly, there is a huge interest cost that the government has already borne and on the outstanding bonds, the 2.5% interest cost will add ₹1,650 crore per annum to government cost. Last, but not the least, if held for full 8 years, the SGBs will be exempt from capital gains tax. That is another revenue loss for the government. If you add these up, it is a wide gap in government SGB numbers. 

Even for a $4.5 trillion economy, this is a rather large unhedged liability, and the government is fully aware of that. The big risk for the government is on the gold prices, so one thing the center can do is to temporarily extend partial tax benefits to investors who hold the sovereign gold bonds for 5 years, rather than 8 years. That will mean; the center is going to lose out on tax flows, but it caps the liability. Most investors in gold bonds are aware there is a price risk at this juncture. However, they do not want to lose out on the tax shield, which makes a big difference to their returns. If the government can find a mid-way, it will cap their liability. Center must be more cautious about unhedged bets!