Note: As I was writing this, the Indian Government effectively discontinued the Gold Monetisation Scheme (GMS). GMS is separate from the Sovereign Gold Bond (SGB) scheme. With GMS, you deposit physical gold and receive interest paid in Indian Rupees at the prevailing market rate at the time of deposit. Everything concerning the role of the Indian Government as the sovereign issuer of the Rupee still applies. Both GMS and SGB don’t make much sense for their stated reasons i.e. to encourage Indians to import less gold or to have the Government hold more gold. However, GMS carries a default risk because “the redemption of principal at maturity shall, at the option of the depositor, be either in Indian Rupee equivalent of the value of deposited gold at the time of redemption, or in gold.” Redemption in gold means if the Government uses the gold deposited by individuals (for trade, or sells it in the market for foreign exchange or even Rupees) instead of hoarding it, there’s a chance of default. You’re trusting the Government to pay you back in a “thing” it can’t create out of nothing, unlike Rupees.
