Whalesbook
Policy Shift on Gold Imports
India has doubled import duties on gold and silver to 15% from 6%, a significant policy shift aimed at protecting foreign exchange reserves and reducing the current account deficit. This move signals concern about the country's financial balance, heightened by geopolitical tensions and volatile energy prices.
Reasons for the Duty Hike
Gold prices were around $4,709.20 per ounce and silver near $87.42 per ounce on May 13, 2026. New Delhi's decision to hike tariffs directly increases the cost of these precious metals for Indian consumers and industries. The measure is designed to curb imports, which cost the nation a record $84 billion in the last fiscal year. This directly impacts the trade balance and aims to support the rupee. India's foreign exchange reserves, though substantial at approximately $691 billion, have declined by nearly $38 billion amid recent geopolitical pressures. This situation requires measures to manage money leaving the country, with the duty hike being a significant part of that strategy.
Gold Demand Faces Duty Hikes but Remains Resilient
Historically, India's gold demand has shown little change with price increases and duty adjustments. When import tariffs were raised to 10% between 2012 and 2013, annual demand stayed steady, averaging around 718 metric tons, even as local prices surged over 400% in the decade prior. Analysts project India's gold demand for 2026 in the range of 600-700 metric tons, a five-year low. However, this figure predates the latest tariff hike and suggests significant investment demand may persist.
Investment Outpacing Jewellery Demand
The traditional jewellery sector, accounting for nearly 75% of gold consumption, has faced pressure from elevated prices, with Q1 2026 jewellery demand falling approximately 15% year-on-year. Conversely, investment demand has surged, driven by geopolitical uncertainty and weaker equity market returns. This has surpassed jewellery consumption for the first time in the March quarter of 2026. Gold ETFs have seen significant inflows, showing a shift towards gold as a store of value and a hedge against inflation and currency weakness. This trend matches global central bank gold accumulation, with purchases expected to remain strong in 2026.
Smuggling Profit Margins Grow Sharply
The substantial increase in import duties is poised to create a strong incentive for illicit trade. Grey market margins on smuggled gold are now estimated at around 18%, up from roughly 9% previously. The profit for smuggling a kilogram of gold has climbed to a record 3 million rupees, far exceeding the profitability of legitimate channels. This presents a considerable risk of increased smuggling, potentially negating some of the intended foreign exchange savings and creating enforcement challenges.
Silver's Industrial Outlook
While gold faces demand pressures, silver's outlook in India is boosted by its increasing industrial use. Demand is expected to rise, driven by government initiatives in renewable energy and technological advancements, particularly in solar panels and electronics. However, high prices may still temper demand for silverware, which is highly price-sensitive in India.
Policy Risks and Enforcement Challenges
The government's firm stance on gold and silver import duties, intended to address economic imbalances, carries significant risks. Historically, higher import duties have been more effective at increasing smuggling profits than at substantially reducing overall demand. This is particularly true for gold, which is deeply integrated into Indian culture as a long-term asset, hedge against inflation, and emergency financial resource. The current move back to a 15% duty, after a reduction in 2024 aimed at curbing illegal imports, risks reigniting the grey market. An estimated 2.6 metric tons were seized in FY24-25, showing only detected attempts; actual smuggled volumes likely range from 10-15 metric tons annually. The UAE-India corridor remains a primary smuggling route. Furthermore, while investment demand is strong, a significant downturn in jewellery sales could impact an industry that accounts for a substantial portion of India's gold consumption and employment. The policy may lead to higher compliance costs for jewellers and strain enforcement agencies, potentially causing revenue losses through evaded customs duties, estimated to exceed 7.7 billion rupees annually from detected smuggling alone.
Outlook for Gold and Silver
Analysts forecast India's gold demand to contract in 2026, potentially by 10% to 15%, due to the combined impact of high prices and new duties. However, global demand for gold is expected to remain strong, supported by continued central bank purchases and investor interest in safe-haven assets amid geopolitical uncertainty. J.P. Morgan projects gold prices to reach around $5,000/oz by the fourth quarter of 2026, driven by sustained central bank and investor demand. For silver, forecasts are bullish, driven by its crucial role in green energy technologies and persistent global supply deficits, despite potential short-term impacts from higher import duties.