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Echoes of Gold: India’s Legacy

Overview of India’s Historical and Cultural Connection with Gold:

• Gold has been a part of India’s cultural and economic fabric since ancient times.
• The Vedas associate gold with wealth, power, and spiritual illumination.
• During the Gupta and Maurya empires, gold was used as a medium of exchange and a symbol of wealth.
• The Gupta period was known as the “golden age” due to extensive gold coinage.
• The Mughal Empire emphasised gold in architecture and ornamentation.
• British colonial rule altered gold trade patterns, reinforcing cultural affinity for gold.

Importance of Gold in the Indian Economy

• Gold functions as a consumer good, investment asset, and sociocultural necessity.
• Estimated 25,000 tonnes of gold held by Indian households and temples.
• Serves as a hedge against inflation and economic instability.
• Key macroeconomic impact are India’s high gold imports influence the Current Account Deficit (CAD) and rising CAD due to gold imports affects the depreciation of the Indian Rupee (INR).

Demand in India

Consumption Trends: Household vs Institutional

Regional distribution:

• South India accounts for 40% of total jewellery demand.

Income-based demand:

• Middle-class drives 50% of total demand.
• 51% of demand comes from individuals with annual incomes between Rs. 200,000 and Rs. 1,000,000.

Recent trends:

• 2023 gold demand: 747 tonnes (-3% YoY).
• Jewellery demand: 562.3 tonnes (-6% YoY) due to high prices.
• Gold prices surged from INR 55,375 to 66,532 per 10g (Nov 2023 – May 2024).
• As of March 2025, domestic gold prices rose 13% YTD, boosting investment demand.

Sectoral Consumption: Jewellery & Investment

Jewellery Sector :

• 75% of total Indian gold demand (562.3 tonnes in 2023).
• India & China together account for over 50% of global jewellery demand.
• Rising gold prices are shifting consumer preference to lightweight/lower-carat jewellery.

Investment Sector :

• Second-largest consumption category.
• 33% of global gold demand attributed to investments.
• Gold ETFs recorded strong inflows in early 2025 despite price hikes.

Gold Imports & Reserves : RBI’s Role and Foreign Exchange Impact

RBI’s Gold Reserves (as of Sept 2024):

• Total: 854.73 tonnes.
• 510.46 tonnes (60%) held domestically.
• 324.01 tonnes stored with Bank of England & BIS.
• 20.26 tonnes held as gold deposits.

Foreign Exchange Impact:

• Gold’s share in forex reserves increased from 8.15% (March 2024) to 9.32% (Sept 2024).
• July 2024: Import duties cut from 15% to 6%, triggering a surge in imports.
• Gold imports dropped to an 11-month low due to high prices.

Gold imports dropped to an 11-month low due to high prices.

Financial Drivers : Impact of Rising Inflation

• Gold is widely regarded as a hedge against inflation. During periods of high inflation, the purchasing power of fiat currencies declines, prompting investors to turn to gold as a store of value.
• According to the World Gold Council, for every 1% increase in inflation in India, gold demand rises by 2.6%.
  This dynamic was evident in 2023 when global inflation drove gold prices to near-record levels of $2,000 per ounce.

Financial Drivers : Rupee Depreciation and Its Effect

• When the rupee depreciates against the dollar, the cost of importing gold increases, driving up local prices.
  For instance, during the rupee’s decline from ₹61.81 to ₹83.25 per USD (2013–2023), gold prices surged significantly.
• In February 2025, amid rupee depreciation, domestic gold prices reached ₹89,350 per 10 grams.

Interest Rate Policies and Their Influence on Gold

• Gold has an inverse relationship with interest rates. Higher interest rates increase the attractiveness of yield-bearing assets like bonds, reducing demand for non-yielding assets like gold.

Gold as a Safe Haven Asset

• Gold is often viewed as a safe haven during stock market downturns or economic crises due to its low correlation with equities. Studies show that during periods of high market volatility or geopolitical tensions, investors increase allocations to gold to mitigate portfolio risks.

Role of Gold in the Indian Financial System

Impact of Gold Imports on India’s Current Account Deficit (CAD)

India’s substantial gold imports have a pronounced effect on the country’s Current Account Deficit (CAD). High demand for gold increases import bills, widening the trade deficit.

 

In November 2024, gold imports doubled compared to October, amounting to $14.8 billion, driven by festive demand during Dussehra and Diwali. Balancing gold imports is crucial for maintaining economic stability and managing the CAD effectively.

Role of Gold in the Indian Financial System

The Success of Gold Monetisation Schemes (GMS) in India:

The Gold Monetisation Scheme (GMS) aims to mobilise idle gold held by households and institutions, offering interest on deposited gold and reducing reliance on imports. Despite its potential, the scheme has faced challenges, including limited public awareness and concerns over the security and purity of gold deposits.

 

As of March 2025, the total gold collected under GMS remains modest compared to the vast reserves held by Indian households.

Regulatory Policies & Investment Shifts

Import Duties, Tariffs, and Their Dual Impact

• India’s reliance on gold imports—which account for ~90% of domestic demand—has made import duties a pivotal tool for balancing trade deficits and stabilising currency reserves.
• In March 2025, the government reduced import tariffs on gold by $11 per 10 grams to $927, aiming to curb smuggling by narrowing the price gap between legal and illicit markets.
• The 2025 duty cut aligns with findings that lower tariffs correlate with reduced smuggling activity, as arbitrage opportunities diminish.
• However, this policy risks boosting demand for physical gold, potentially exacerbating India’s current account deficit—a perennial concern for policymakers.

Restrictions on Gold Imports: Licensing and Quotas

• 20% of imported gold is reserved for re-export as jewelry
• Criticised for creating supply bottlenecks & inflating domestic premiums
• In 2025, the government allowed select importers to bring in unstudded gold without licenses, streamlining supply chains for manufacturers while maintaining oversight.

Formalisation of Gold Trading

• The government introduced a 3% GST on gold in 2017 (1.5% CGST + 1.5% SGST) replaced a fragmented tax regime, reducing discrepancies between organised and unorganised sectors.
• GST has improved traceability, curbing under-the-table sales that previously accounted for ~70% of the market.
• However, the higher tax burden (compared to the pre-GST 1.2% levy) has raised consumer prices, driving some demand toward informal channels.

Safeguarding Gold Investments : The role of SEBI & RBI

• In 2021, SEBI barred brokers from offering unregulated “digital gold” platforms, citing risks of mis-selling and liquidity mismatches.
• Concurrently, RBI’s Sovereign Gold Bonds (SGBs)—offering 2.5% annual interest alongside capital appreciation—have attracted over ₹50,000 crore ($6 billion) since 2015, diverting demand from physical holdings.

Investment Shifts & Patterns in Gold

From Bars to Bytes: A Paradigm Shift

• Digital gold platforms like SafeGold, Paytm Gold, and Tanishq DigiGold have democratized access, allowing investments as low as El with 24/7 liquidity
• These platforms hold 99.9% pure gold in insured vaults, addressing purity and security concerns that plague physical holdings.

What can you do with your Digital Gold?

1. Take Physical Delivery
2. Sell whenever you want
3. Gift to your friends & Family

Gold ETFs and Mutual Funds: Institutionalising Demand

 

• Gold Exchange-Traded Funds (ETFs), pioneered by Nippon India’s Gold BeES in 2007, now manage assets worth over 60 tonnes of gold in assets
• ETFs mirror domestic gold prices, offering liquidity and transparency absent in physical markets.
• Similarly, gold-focused mutual funds have gained traction, with inflows rising by 40% YoY in FY2024-25 as retail investors diversify portfolios.

Sovereign Gold Bonds and Retail Participation

• SGBs have emerged as a preferred alternative, combining safety, tax efficiency, and yields.
• With a minimum investment of 1 gram (€6,000-₴7,000) and an annual interest rate of 2.5%, SGBs appeal to risk-averse investors seeking inflation hedges

Fintech’s Role in Democratising Access

• Platforms like Jar and Gullak leverage behavioural nudges (e.g., round-up investments) to channel small savings into gold, while Airtel Payments Bank’s DigiGold links gold purchases to mobile recharges.
• These innovations have expanded access to underserved demographics: 30% of digital gold users are first-time investors from tier-2/3 cities.
• Meanwhile, blockchain-based solutions are enhancing transparency, with MMTC-PAMP and Augmont launching tamper-proof digital certificates for stored gold.

Future Outlook:

Predicted Trends in Gold Demand & Prices

• Moderating Gold Consumption: India’s gold demand is expected to decline to 700-800 metric tons in 2025, down from 802.8 tons, due to record-high prices impacting jewelry sales.
• Rising Investment Demand: While jewelry demand dips, investment in gold is set to grow, driven by its safe-haven appeal and the rise of ETFs, digital gold, and coins.
• Price Volatility: Gold prices will remain volatile, influenced by geopolitical tensions, inflation, and currency fluctuations, potentially driving further price increases.