In a remarkable display of investor confidence, Indian residents have continued to flock to gold bonds despite the metal reaching record high prices during this fiscal year. Data from the Reserve Bank of India (RBI) reveals that in the latest issuance last month, residents subscribed to a staggering 12.78 tonnes of bonds, amounting to ₹8,008.38 crore or $966 million. This figure represents the highest-ever subscription amount since the inception of gold bond issuances over eight years ago.
The issue price for these bonds was set at a record high of ₹6,263 per gram. Despite the steep price, consumer appetite for these bonds, which serve as an alternative to holding physical gold, remained strong. In fact, data shows that during the fiscal year 2023-24, residents subscribed to a total of 44.33 tonnes of gold bonds, marking the highest volume in any fiscal year to date.
The surge in demand for gold bonds comes amidst a backdrop of soaring gold prices in the spot market. Gold prices hit a record high of ₹63,480 per 10 grams (ex-GST) as international markets began factoring in expectations of an interest rate cut in the United States. Surendra Mehta, the national secretary of the India Bullion & Jewellers Association, noted that the high prices had somewhat dampened demand for physical gold.
Despite the challenging market conditions, the fiscal year 2023-24 saw a significant increase in the volume and value of gold bond issuances. The 44.33 tonnes subscribed during this period accounted for 31% of the outstanding bonds totaling 141.88 tonnes. In terms of value, the bonds amounted to ₹27,032 crore, with the current fiscal year contributing 38% to the cumulative value of issuances, which stands at ₹71,284 crore.
Experts attribute the rising demand for gold bonds to several factors. Nilesh Shah, Managing Director of Kotak Mahindra AMC, pointed out that the tax-free returns, along with the added benefit of interest and the elimination of storage costs and risks, have been driving investors towards gold bonds. Additionally, Nirav Karkera, the head of research at Fisdom, highlighted gold’s appeal as an asset class and its role in diversification. He emphasized that gold bonds offer an efficient and effective means of exposure to the asset, especially considering the reasonably positive outlook for gold over the medium term.
Investors in gold bonds stand to benefit not only from potential capital appreciation as gold prices rise but also from the added advantage of receiving 2.5% simple interest on the issue price of the bond, payable semi-annually. Furthermore, the capital gains from these bonds are tax-free, while the interest earned is added to the investor’s income and taxed accordingly.
It’s worth noting that gold bonds come with a lock-in period of eight years, although early redemption is permitted after the fifth year on coupon payment dates. The RBI acts as the issuer of these bonds on behalf of the government, and they are made available for purchase through various channels, including nationalized banks, scheduled private and foreign banks, designated post offices, and recognized stock exchanges like the BSE and NSE.
Overall, the strong demand for gold bonds among Indian residents underscores their confidence in gold as a valuable investment asset, even in the face of challenging market conditions and record-high prices. With their attractive features and tax benefits, gold bonds continue to attract investors looking to diversify their portfolios and safeguard their wealth against economic uncertainties.
