India has historically been one of the world's largest gold consumers. In a November 2017 speech, the RBI noted that an annual average of 700-800 tonnes of gold imports had surged past 1,000 tonnes during the troubled years of 2009-12, with gold constituting 11 per cent of total imports. At current prices, annual gold imports represent tens of billions of dollars — a sum that drains foreign exchange reserves and widens the current account deficit more than almost any other single commodity. The gold, once imported, largely disappears into household vaults and temple treasuries. India's household gold stock is among the largest in the world — earning no income, creating no credit, and contributing nothing to the financial system. The Gold Monetisation Scheme was designed specifically to mobilise this idle gold and reduce the country's reliance on imports.
The RBI and the government have spent the last decade trying to solve two problems simultaneously: how to reduce the demand for imported gold, and how to mobilise the gold that is already in the country. The result is two complementary schemes — Sovereign Gold Bonds and the Gold Monetisation Scheme — that together represent India's most ambitious attempt to financialise gold.
Why is gold an RBI problem?
Because the RBI manages India's foreign exchange reserves. Every tonne of gold imported requires an equivalent outflow of dollars. When gold imports surge — as they do during wedding seasons and festivals — the rupee faces depreciation pressure, and the RBI must decide whether to intervene in the forex market to stabilise the currency, depleting reserves in the process.
The current account deficit is the arithmetic: India's imports minus exports. Gold is consistently among the top three import items, alongside crude oil and electronic goods. Unlike oil, which is consumed and generates economic activity, imported gold is largely hoarded. From a macroeconomic perspective, gold imports represent a transfer of productive capital — foreign exchange that could fund infrastructure, technology, or industrial imports — into an asset that sits inert in a bank locker.
This is why the government and the RBI have tried repeatedly to discourage physical gold purchases without alienating a population for whom gold is culturally indispensable. The strategy is not to reduce gold ownership but to change its form: from physical bars and coins to financial instruments that provide gold exposure without triggering imports.
What are Sovereign Gold Bonds?
SGBs are government securities denominated in grams of gold. When you buy an SGB, you are buying a bond whose value tracks the price of gold — but you never receive physical gold. The government issues the bond, the RBI administers it, and the investor gets gold price appreciation plus a fixed annual interest rate.
The first series launched in November 2015 with the Sovereign Gold Bonds, 2015-16 circular RBI/2015-16/218:
"The Bonds shall be denominated in units of one gram of gold and multiples thereof. Minimum investment in the Bonds shall be 2 grams with a maximum subscription of 500 grams per person per fiscal year. Price of the Bonds shall be fixed in Indian Rupees on the basis of the previous week's simple average closing price for gold of 999 purity, published by the India Bullion and Jewellers Association Ltd."
The initial interest rate was 2.75% per annum on the investment amount, paid semi-annually. Subsequent series adjusted this to 2.50% from Series III of 2016-17 onwards. The bond has an eight-year maturity with an option for premature redemption from the fifth year onwards.
The genius of the structure is the interest component. Physical gold earns no income — it sits in a locker and costs money to store and insure. An SGB earns 2.5% annually on the initial investment, compounding the gold price return. For an investor whose primary motivation is investment rather than jewellery, the SGB is strictly superior to physical gold on every financial metric.
Why are SGBs issued in tranches?
The government does not issue SGBs continuously. Instead, the RBI announces specific subscription windows — typically four to six per year — during which investors can apply. The Sovereign Gold Bond Scheme 2020-21 (Sovereign Gold Bond Scheme 2020-21) announced six tranches:
"Government of India, in consultation with the Reserve Bank of India, has decided to issue Sovereign Gold Bonds. The Sovereign Gold Bonds will be issued in six tranches from October 2020 to March 2021."
The tranche-based approach serves the government's borrowing calendar. SGBs are government liabilities — when the bond matures, the government pays the investor the prevailing gold price in rupees. Issuing all SGBs at once would concentrate the government's gold-linked liability; spreading them across the year diversifies the gold price risk.
The issue price for each tranche is determined just before the subscription window opens. The SGB 2017-18 Series X Issue Price (Sovereign Gold Bond 2017-18 Series- X-Issue Price) illustrated the pricing mechanism: the RBI calculates the simple average of IBJA closing prices for the week preceding the subscription period and publishes the issue price. Online applicants receive a Rs 50 per gram discount.
After the subscription period closes, SGBs are listed on stock exchanges, allowing secondary market trading. This provides liquidity before the eight-year maturity — investors who need to exit early can sell on the exchange rather than waiting for the premature redemption window.
How does premature redemption work?
The SGB scheme locks in investors for five years. After that, premature redemption is available on coupon payment dates — the semi-annual interest payment dates. The RBI publishes the redemption price for each maturing series:
The premature redemption of SGB 2017-18 Series XIII (Premature redemption under Sovereign Gold Bond (SG) specified the redemption price based on the average gold price for the three business days preceding the redemption date.
The dematerialisation announcement (Sovereign Gold Bond - Dematerialisation) noted that the RBI issued seven tranches totaling Rs 4,800 crore in the early years of the scheme, with investors given the option to hold bonds in physical certificate or demat form.
What is the Gold Monetisation Scheme?
If SGBs reduce the demand for new gold imports, the Gold Monetisation Scheme targets the supply side — the vast stock of gold already sitting in Indian households. The scheme allows depositors to hand over their idle gold to a bank and earn interest on it, just like a fixed deposit.
The Gold Monetization Scheme, 2015 Master Direction (since withdrawn) established three deposit types:
Short Term Bank Deposits (STBD): 1-3 years, held on the bank's balance sheet. The bank pays interest, takes custody of the gold, and can lend it or sell it on the domestic market. At maturity, the depositor gets back the gold (in weight) or its rupee equivalent.
Medium Term Government Deposit (MTGD): 5-7 years, with the government bearing the interest cost. These deposits were designed for temples and trusts holding large gold stocks.
Long Term Government Deposit (LTGD): 12-15 years, also government-backed.
The principal is denominated in gold — if you deposit 100 grams, you get back 100 grams (or the equivalent rupee value) at maturity. Interest was calculated in Indian Rupees with reference to the gold price at the time of deposit, per the June 2018 amendment RBI/2017-18/192 (since withdrawn):
"The short term deposits shall be treated as bank's on-balance sheet liability. These deposits will be made with the designated banks for a short period of 1-3 years (with a facility of roll over). Deposits can also be allowed for broken periods."
The April 2021 amendment RBI/2021-22/13 (since withdrawn) — which superseded the original 2015 GMS operational guidelines and consolidated the piecemeal amendments into a single updated framework — expanded the collection infrastructure by introducing GMS Mobilisation, Collection and Testing Agents (GMCTAs) — certified jewellers and refiners authorised to accept gold deposits on behalf of designated banks. This addressed a practical barrier: depositors were reluctant to travel to bank branches with large quantities of gold, and banks had limited capacity for gold purity testing at their branches.
Why did the government discontinue the MLTGD component?
In March 2025, the government discontinued the Medium and Long Term Government Deposit components of GMS:
"Government of India... has decided to discontinue the Medium Term and Long Term Government Deposit (MLTGD) components of GMS with effect from March 26, 2025... The designated banks, at their discretion, may offer Short Term Bank Deposits (STBD) under GMS."
— Gold Monetization Scheme (GMS), 2015 - Amendment RBI/2024-25/132 (since withdrawn)
The discontinuation reflected a candid assessment: the MLTGD components had failed to attract significant deposits. Households were unwilling to lock up their gold for 5-15 years at modest interest rates, especially given the cultural attachment to physical possession. The Short Term Bank Deposits, with their 1-3 year tenor, had modestly better traction because the commitment was shorter and the gold could be returned in kind.
The existing MLTGDs mobilised before the cutoff continue until redemption. The scheme now functions primarily through the STBD channel, with banks having discretion over whether to accept deposits.
Why has gold monetisation underperformed expectations?
The fundamental obstacle is cultural. For most Indian households, gold is not an investment — it is insurance, inheritance, and social status. Handing over family gold to a bank, receiving a paper receipt, and trusting the bank to return it years later requires a level of institutional trust that decades of bank scandals have not built.
The interest rates on GMS deposits are also uncompetitive. Short-term deposit interest rates under GMS are modest — the scheme's operational guidelines (since withdrawn) leave rate-setting to the designated banks, and the rates offered have consistently been lower than standard savings account yields. For households sitting on gold worth lakhs or crores, the income from GMS deposits is too small to justify the psychological cost of parting with physical gold.
SGBs have performed significantly better than GMS because they serve a different function. SGB investors are typically making new investment decisions — choosing between buying physical gold and buying a gold-linked bond. For them, the 2.5% annual interest is a clear advantage over physical gold's zero yield. GMS depositors, by contrast, are being asked to give up gold they already own — a much harder behavioural ask.
What is the tax treatment, and why does it matter?
Capital gains on SGBs held to maturity are exempt from income tax. This is the single most powerful incentive in the scheme. Physical gold, when sold, attracts capital gains tax. Gold ETFs and gold mutual funds attract capital gains tax. Only SGBs offer complete tax exemption at maturity.
The exemption was designed to encourage investors to hold the full eight-year term rather than trading on the secondary market. If an investor sells an SGB on the exchange before maturity, normal capital gains tax applies. The tax incentive is therefore a retention mechanism — it reduces early redemptions, which in turn reduces the government's liability management burden.
For GMS deposits, the interest earned is tax-free, and capital gains on the gold value are also exempt. Despite this, the low interest rates have limited the scheme's appeal. The January 2019 amendment RBI/2018-19/104 (since withdrawn) made further operational adjustments to the scheme, but the fundamental attractiveness problem persists.
The SGB program, despite its relative success, has its own fiscal challenge: the government now carries a large gold-price-linked liability. If gold prices rise sharply — as they have since 2020 — the government's redemption cost increases proportionally. The premature redemption of SGB 2017-18 Series X (Premature redemption under Sovereign Gold Bond (SG) illustrated this: investors who bought at Rs 2,961 per gram in 2017 were redeeming at significantly higher prices in 2025. Whether the fiscal cost of SGBs is justified by the forex savings from reduced gold imports is a calculation the government makes every year when deciding how many tranches to issue.
Also in this series:
- Government Securities and the Money Market: Complete Timeline
- How India Built Its Bond Market
Last updated: April 2026