Gold Imports and the Indian Economy – Impact on CAD, Rupee and Policy Measures

Gold imports significantly impact India’s current account deficit, forex reserves, and exchange rate stability. Explore causes of high gold demand, economic effects, RBI’s role, and government measures like Sovereign Gold Bonds and Gold Monetisation Scheme.

Table of Contents

Context

Indian households are diversifying their savings, with investments in mutual funds and equities rising sharply — from 7% of financial assets in 2022–23 to 15% in 2024–25 — while bank deposits declined slightly. However, the long-standing preference for gold remains strong.
- Gold imports surged to $12.07 billion in January, nearly tripling from December.

Why India Imports So Much Gold

● India is one of the world’s largest consumers and importers of gold, despite producing negligible quantities domestically.

● This structural dependence is driven by a combination of cultural, economic, and financial factors.

● First, cultural and social factors play a major role.

○ Gold is deeply embedded in Indian traditions, especially weddings, festivals, and religious ceremonies.

○ It is viewed not merely as a luxury good but as a symbol of prosperity, security, and social status. Household demand remains stable even during economic slowdowns.

● Second, gold as a store of value explains persistent demand.

○ In many Indian households, particularly in rural and semi-urban areas, gold is preferred over financial instruments due to limited financial literacy, distrust of formal markets, and ease of liquidity.

○ Gold is often treated as an inter-generational asset.

● Third, macroeconomic uncertainty and inflation hedging increase gold demand.

○ During periods of high inflation, currency volatility, or weak equity market performance, investors shift towards gold as a safe-haven asset.

○ Historically, whenever equity returns are sub-optimal or global uncertainty rises, gold demand in India increases.

● Fourth, limited domestic alternatives for long-term savings also contribute.

○ Pension penetration remains low, and risk-averse households often find gold more reliable than equities or debt instruments.

○ This structural preference results in sustained imports, adversely impacting India’s current account balance.

India’s Historical Affinity for Gold

● India has consistently been among the world’s largest consumers of gold. Beyond investment, gold carries deep cultural and social significance, especially during weddings and festivals.

● Post-2008 Gold Surge : Following the global financial crisis, high inflation, currency depreciation, and economic uncertainty drove households toward gold as a safe-haven asset. This resulted in sharp increases in imports, widening the current account deficit.

● Policy Response : To curb rising imports, the government raised customs duties and introduced alternative instruments such as Sovereign Gold Bonds (SGBs) to channel savings away from physical gold.

● Structural Import Dependence : India imports the bulk of its gold requirements, making domestic demand directly linked to foreign exchange outflows and trade imbalances.

A growing channel for this investment is gold exchange-traded funds (ETFs), reflecting the increasing financialisation and formalisation of household savings, even as it adds to gold import pressures.

Gold ETFs: From Niche Product to Investment Wave

Gold ETFs function like mutual funds that invest in gold. They offer advantages over physical gold—no concerns about purity, storage, or security, and the flexibility to invest in small amounts.
The fund handles gold purchases based on investor inflows.

Record Inflows in January

What began modestly in 2007 surged dramatically in January. According to the World Gold Council, Indian gold ETFs purchased a record 15.52 tonnes of gold in January—nearly equal to the previous three months combined.
Data from AMFI show net gold ETF inflows more than doubled to an all-time high of ₹24,040 crore, even as equity mutual fund inflows fell 14% to ₹24,029 crore.
For the first time, gold ETFs attracted more investment than equity funds.
Gold ETF inflows accounted for 22% of total gold imports (₹1.1 lakh crore) in January. The share was even higher for silver—52% of silver imports were linked to ETF inflows.

Speculation and Economic Concerns

Analysts suggest the surge may reflect large-scale speculation in precious metals.
While it may represent a shift from physical gold demand, concerns remain that heavy investment in gold—financial or physical—effectively amounts to capital moving out of the domestic economy.

Gold Rush Redux

After the 2008 global financial crisis, high inflation, a weakening rupee, and slow growth drove Indian households toward gold.
Imports surged, forcing the government and RBI to curb free imports and introduce measures to discourage physical gold purchases.

Significance of the Issue

External Sector Stability: Gold imports contribute significantly to the current account deficit (CAD), increasing vulnerability to global capital flow volatility.
Capital Allocation Efficiency: High household investment in gold diverts resources from productive sectors like infrastructure, manufacturing, and entrepreneurship.
Fiscal Sustainability: Schemes designed to reduce physical imports, such as SGBs, create contingent fiscal liabilities.
Currency and Exchange Rate Pressures: Persistent gold imports increase demand for dollars, potentially exerting depreciation pressure on the rupee.
Behavioural Economics Dimension: Gold remains a preferred hedge against uncertainty despite expanding financial markets.

Sovereign Gold Bonds

● Launched in 2015, Sovereign Gold Bonds (SGBs) offered returns linked to gold prices plus 2.5% annual interest.

● Indians invested in bonds equivalent to 147 tonnes of gold worth ₹72,274 crore, reducing the need for physical imports.

● Rising gold prices made the scheme costly, with annual payouts nearing ₹18,000 crore. The government discontinued SGBs in early 2024 due to mounting fiscal pressure.

Renewed Concerns Over Gold Investments

Although inflation is currently moderate, geopolitical tensions, policy uncertainty, and uneven global stock market gains have renewed interest in gold as a safe haven.
A January spike in gold ETF-driven imports pushed India’s goods trade deficit close to $35 billion, highlighting macroeconomic risks.
Given rising precious metal demand, a redesigned Sovereign Gold Bond scheme—possibly extended to silver and other metals—may help manage imports while offering households structured investment alternatives.

Challenges and Way Forward

Redesign Gold Investment Instruments: Develop fiscally sustainable alternatives to SGBs with calibrated returns.
Promote Gold Monetisation Schemes: Mobilise idle domestic gold holdings to reduce import dependence.
Strengthen Financial Literacy: Encourage diversified portfolios aligned with long-term wealth creation.
Calibrated Import Duty Policy: Balance revenue needs with smuggling risks.
Enhance External Sector Monitoring: Closely track precious metal-driven trade imbalances to maintain macroeconomic stability.

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