Sovereign gold bond one of dumbest government borrowing programs in world: Fundoo Professor

Synopsis

Sanjay Bakshi, also known as Fundoo Professor, has criticized India's sovereign gold bond (SGB) scheme, deeming it a flawed government borrowing program. He points to the high effective borrowing cost, exceeding 19% annually, and the lack of risk management. The scheme, designed to curb gold imports, has turned into a costly liability for taxpayers.

India’s sovereign gold bond (SGB) scheme – once touted as an innovative solution to curb gold imports – has come under sharp criticism from investor and academic Sanjay Bakshi, popularly known as Fundoo Professor. Taking to X, Bakshi called the scheme “one of the dumbest government borrowing programs in the world,” citing the high effective cost of borrowing and poor risk management that he believes was baked into its design.

“The effective cost of borrowing is turning out to be more than 19% per annum,” he wrote, adding that “the individuals who designed this instrument should receive the award for creating one of the dumbest government borrowing programs in the world.”

Bakshi drew parallels to the Foreign Currency Convertible Bonds (FCCBs) issued by Indian companies in 2008, noting how those issuers suffered massive losses when “the INR’s depreciation and stock prices collapsing” left them unable to hedge currency risk.

He highlighted that while defaults are unlikely in the case of SGBs since “the issuer can print money,” the episode still represents “a great example of total ignorance of basic risk management.”

This was in response to a separate post by Ritesh Jain, Founder of Pinetree, which explained why the scheme was conceived in the first place.

He recalled that back in 2015, India’s trade deficit was rising as households were buying physical gold, putting pressure on the rupee.

“Somebody in the finance ministry… decided to create a synthetic instrument to satiate the Indian appetite for gold via a structured product which was only backed by the confidence of Indian govt but did not have real gold to back the bond,” Jain said, describing how Indian households were effectively “going long on gold and on other hand Indian govt was going naked short on gold.”

Bakshi’s post sparked reactions from market watchers. One user called it “FCCB 2008 déjà vu,” pointing out that “now govt never hedged GOLD risk. Effective 19% borrowing cost is INSANE for a sovereign instrument meant to reduce imports.”

He added that “SGBs turned into a free call option for households, a bleeding liability for state” and warned that “unlike corporations in 2008, the government won’t default, but TAXPAYERS eat the loss… By not backing with physical metal, govt ended naked short. Now bond prices quadruple, fiscal cost balloons.”

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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