Sovereign Gold Bond (SGB):A Manufactured Foreign Exchange Crisis and Probable Way Out

SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The quantity of gold for which the investor pays is protected, since he receives the ongoing market price at the time of redemption/ premature redemption. The SGB offers a superior alternative to holding gold in physical form. The risks and costs of storage are eliminated. What exactly the government intends to do is that by issuing these bonds the government of India essentially wants to control the imports of physical gold. This paper tries to make an attempt to understand the impact of scheme on Balance of Payment, on the Foreign Exchange and to understand if the scheme will generate exchange rate instability.