Gold Policy Shake-Up: Government Raises Import Duty to 15 Percent as India Battles Rising Current Account Deficit and Currency Pressure

The measures are aimed at protecting India’s foreign exchange reserves and strengthening the rupee at a time when external pressures are mounting. India, the world’s second-largest consumer of gold, meets nearly 90 percent of its demand through imports, making the metal a persistent driver of pressure on the country’s external account balance.

In fiscal year 2026, gold imports surged to nearly 72 billion dollars despite a decline in import volumes, primarily due to a sharp rise in global prices. This sustained import demand has intensified concerns over the widening current account deficit, particularly as India simultaneously faces elevated crude oil prices driven by geopolitical tensions in West Asia.

Economists note that the combination of crude oil and gold imports has significantly widened the current account deficit, placing downward pressure on the rupee. A rising deficit not only weakens the currency but also increases borrowing costs, reduces investor confidence, and heightens exposure to external financial shocks. In this context, restricting gold imports has been positioned as a short-term corrective measure to ease pressure on foreign reserves and stabilize macroeconomic indicators.

Gold imports alone account for approximately 9 to 10 percent of India’s total import bill, underscoring their importance in the country’s external trade imbalance. However, demand for gold in India remains deeply rooted in cultural practices, including weddings and festivals, as well as long-term investment behavior. This structural demand makes consumption highly resilient even during periods of price increases.

India has repeatedly witnessed similar policy cycles. Previous sharp increases in import duty led to a rise in gold smuggling, undermining official trade channels and reducing government revenue. In response, authorities had reduced the duty to 6 percent in the previous year to narrow the price gap between domestic and international markets and discourage illegal inflows. The latest increase back to 15 percent has once again raised concerns about the potential resurgence of illicit trade and parallel supply networks.

While higher prices may temporarily slow official demand as consumers delay purchases or opt for lighter jewellery, analysts note that seasonal demand patterns driven by weddings and festivals typically restore consumption levels. With the peak buying season approaching, imports are expected to remain firm, even if unofficial channels expand due to price differentials.

Policy discussions have also highlighted alternative measures to address structural gold demand. These include expanding and simplifying the Gold Monetization Scheme to mobilize idle household and institutional gold holdings, establishing a centralized gold banking system to improve transparency in imports and distribution, and encouraging greater use of Sovereign Gold Bonds and gold-backed financial instruments to shift demand from physical assets to financial products.

Gold Exchange Traded Funds and Sovereign Gold Bonds are also seen as instruments that provide exposure to gold without concerns related to purity, storage, or making charges, while improving liquidity and, in some cases, offering additional interest income.

Despite short-term policy interventions, gold continues to be viewed as a long-term hedge against geopolitical uncertainty and economic volatility. With ongoing tensions in West Asia influencing global energy markets and inflation expectations, gold prices may remain sensitive to external developments, potentially reinforcing its appeal among investors over the longer term.

The effectiveness of the current policy shift will ultimately depend on its ability to balance external sector stability with India’s entrenched cultural and investment demand for gold.