India has raised gold import duty to 15% and urged citizens to buy less gold. This move targets foreign reserves and the rupee’s value. However, India’s strong cultural demand for gold may limit effectiveness. Higher duties could also boost illegal gold imports. Investors should consider gold as a long-term hedge.
Prime Minister Narendra Modi’s recent appeal to citizens to curb gold buying for one year, followed by the government’s decision to raise customs duty on gold from 6% to 15%, has sparked debate across economic and investment circles. The move is aimed at protecting India’s foreign reserves and strengthening the rupee. However, given India’s cultural affinity for gold and past experiences with similar measures, the effectiveness of this policy remains questionable.
Why the Appeal to Citizens
India is the world’s second-largest consumer of gold, with nearly 90% of its demand met through imports. This heavy reliance has consistently placed pressure on the current account deficit (CAD), making gold a critical factor in India’s external balance. In FY26, gold imports surged to nearly $72 billion, despite lower import volumes, largely due to rising global prices. Such persistent demand has prompted the Prime Minister to urge citizens to voluntarily reduce consumption, aiming to ease the burden on foreign reserves and stabilize the rupee. The appeal also reflects concerns over widening CAD amid elevated crude oil prices, which together strain India’s economy. By curbing gold buying, the government hopes to conserve forex reserves and strengthen the currency.
Current Account Deficit and Crude Oil Prices
India’s current account deficit (CAD) has widened considerably, driven primarily by two major imports, crude oil and gold. Elevated crude oil prices, fuelled by ongoing geopolitical tensions in West Asia, have placed significant downward pressure on the rupee. A rising CAD not only weakens the currency but also increases borrowing costs, reduces investor confidence, and heightens vulnerability to external shocks. In this context, restricting gold imports is viewed as a temporary measure to ease the imbalance and conserve foreign reserves.
Gold Imports and Forex Pressure
Gold imports account for nearly 9–10% of India’s total import bill, making them a significant contributor to external imbalances. By curbing imports, the government hopes to conserve foreign reserves, reduce pressure on the current account deficit, and stabilize the rupee. Yet the structural nature of India’s gold demand, deeply rooted in cultural traditions, weddings, and festivals, limits the effectiveness of such restrictions. Even when prices rise, demand tends to rebound during peak seasons, reflecting gold’s enduring role as both ornament and investment. Thus, while the policy may offer short-term relief, its long-term impact remains uncertain.
First published in The Economic Times.