That is the million dollar question. The answer is that the individual gold bond buyer will have to bear the currency risk. The government will not bear the risk to gold prices arising from any dollar fluctuations as that is outside the purview of the issuer. Also dollar movements are not exactly in the control of the RBI. But why is currency risk so important. Remember, gold prices are internationally set in dollars. Let us assume that the global price of gold goes from $1200/oz to $1300/oz. That is an 8.5% appreciation in the price of gold during the year. But during the same time if the Indian rupee has depreciated by 12.5% against the US dollar, then the price of Indian gold would have actually depreciated by 4%. Since the terms of the SGBS clearly mentions that the deposit and redemption will be done in INR, the 4% loss in the above case will have to be borne by the depositor. That is not a very exciting scenario.

The government could have done two things here. It could have probably reduced the rate of interest slightly and taken the currency risk of gold. Price risk is something, the individual investors can assume, but expecting them to take on the currency risk is a tad too much. Better still, the government could have done a general hedge at a macro level and passed on the benefits to the depositors at a nominal cost. This currency risk may largely take away the attractiveness of the SGBS.