Gold price falls after import duty cut in Budget 2024; check impact on sovereign gold bonds returns

The August gold futures fell 6% or by ₹4,268 per gram to hit an intraday low of ₹68,500 on Tuesday, July 23, following a custom duty cut announced by Finance Minister Nirmala Sitharman in Budget 2024. Sitharaman proposed to slash import duties on gold and silver from 15% to 6%.

“To enhance domestic value addition in gold and precious metal jewellery in the country, I propose to reduce customs duties on gold and silver to 6 per cent and that on platinum to 6.4 per cent,” the Finance Minister said in her Budget speech.

The returns on Sovereign Gold Bonds (SGBs) are likely to shrink after the sharp decline in gold rates, according to experts. The customs duty cut could further reduce demand for SGBs. With cheaper gold available in the market, investors will opt for physical gold over SGBs, leading to a fall in value.

Gold futures prices have suffered a significant decline, falling for the fourth consecutive day to indicate a strong bearish sentiment in the market. The gold prices have dropped 8% over the past four days.

The decline in gold prices is being seen as a major concern for investors who perceive the precious metal as a safe-haven asset during times of economic uncertainty.

Reserve Bank of India issues sovereign gold bonds for eight years with an exit option from the fifth year, which is to be exercised on the interest payment date. This decline has led to a decrease in the value of SGBs, which are pegged to the price of physical gold.

The latest Sovereign Gold Bonds (SGB) 2023–24 Series IV were issued at ₹6,263 per gram, offering a fixed interest rate of 2.5% per annum payable annually on the nominal value.

The next tranche of SGBs was expected to be issued by RBI for subscription in June 2024 but got delayed. Historically, the RBI releases four tranches of SGBs during the fiscal year, and June is a typical month for the Series 1 issuance.