Gold reserve fund likely to see high allocation in RE of FY26, BE of FY27

Soaring Gold Prices Pile Pressure on Government Finances

India's government is bracing for a hefty financial commitment as gold prices skyrocket, putting strain on the Gold Reserve Fund dedicated to Sovereign Gold Bonds (SGBs). These bonds, launched years ago to channel household gold savings into productive investments, are now coming due at much higher redemption values than their original issue prices. What started as a smart way to curb physical gold demand has turned into a major budget headache. Bonds from the 2017-18 and 2018-19 series, bought at around ₹2,881 to ₹3,326 per unit, could now fetch investors between ₹9,486 and over ₹14,853 upon maturity or early redemption. With domestic gold prices hitting ₹16,500 to ₹17,000 per gram recently, driven by global inflation fears and geopolitical tensions, the gap between issuance and payout costs has widened dramatically.

This fiscal squeeze echoes what happened in FY25, when the fund's allocation ballooned from an initial ₹8,550 crore to over ₹28,000 crore in revised figures. For FY26, the original budget of ₹700 crore is likely to see a sharp upward revision, reflecting these unavoidable liabilities. Looking to FY27, even more tranches will mature, including six from the 2018-19 series and ten from 2021-22 that qualify for premature exits. Issued at ₹3,114–₹3,326 and ₹4,777–₹5,109 respectively, their redemptions will demand substantial outlays at today's elevated rates. The shift underscores how the program's success in attracting investors now burdens the budget with redemption pressures.

Budget Projections Signal High Allocations Amid Economic Optimism

As the Union Budget approaches, expectations are building for robust allocations to the Gold Reserve Fund in both FY26's revised estimates and FY27's budget blueprint. This comes against a backdrop of strengthening economic indicators, including a surge in foreign exchange reserves to $701.36 billion, with gold holdings jumping $4.623 billion to $117.454 billion in a single week. The Reserve Bank of India's data highlights a strategic pivot, with India trimming US Treasury holdings to a five-year low while boosting gold's share in reserves, signaling diversification away from dollar assets. Meanwhile, capital expenditure plans are ambitious, with projections for FY27 topping ₹12 lakh crore, up 10% year-on-year, supporting infrastructure growth.

Economists point to India's resilient growth trajectory, with the IMF revising FY26 GDP forecast to 7.3% and FY27 to 6.4%, crediting strong domestic demand and momentum. Government efforts to narrow the fiscal deficit below 4.5% of GDP by FY26 add complexity, as SGB payouts could disrupt these targets. Total capex, including grants and public sector spending, has climbed from ₹7 lakh crore in FY16 to nearly ₹20 lakh crore in FY26, maintaining around 5.5% of GDP. Yet, these gold-related expenses represent a wildcard in fiscal planning, forcing a balance between honoring investor commitments and funding growth priorities.

"The dramatic rise in gold prices has transformed our Sovereign Gold Bond scheme from an investment incentive into a significant fiscal obligation, requiring careful budgeting to safeguard our deficit reduction goals," said a senior finance ministry official.

Broader Implications for India's Fiscal Strategy and Reserves

The impending high allocations to the Gold Reserve Fund highlight evolving dynamics in India's financial strategy. While SGB redemptions pose short-term challenges, the broader buildup of gold reserves offers long-term stability, especially amid global uncertainties like volatile crude prices and shifting trade policies. The government's focus has moved from issuing new bonds to managing outflows, potentially curbing future SGB launches. This aligns with efforts to diversify forex reserves, reducing reliance on traditional assets. As bond yields remain elevated despite rate cuts, the Reserve Bank has advanced open market operations to stabilize markets. Investors and policymakers alike are watching how the upcoming budget, due soon, navigates these pressures without derailing growth.

In essence, the Gold Reserve Fund's escalation reflects gold's dual role as both a safe-haven asset and a fiscal test for India. Balancing redemptions with capex ambitions and deficit goals will be key to sustaining economic momentum. The article wraps up key points: surging gold prices are driving up Gold Reserve Fund needs for FY26 RE and FY27 BE, straining budgets amid maturing SGBs, while robust forex growth, capex plans, and positive IMF outlooks provide context for India's fiscal path ahead.