Whalesbook
Indian banks have restarted gold and silver imports after agreeing to pay a 3% Integrated Goods and Services Tax (IGST) at customs. This agreement ends a month-long halt that had disrupted supply chains, clearing approximately 9 metric tons of gold and 34 metric tons of silver in May.
Despite the influx of supply, domestic demand for gold remains subdued. The metal is currently trading at a discount of up to $17 per ounce over official domestic prices. The spot price for gold is around $4,728 per ounce, with the Indian Rupee trading at approximately 0.01045 USD per INR.
This resumption of imports is expected to widen India's persistent trade deficit. The deficit stood at $20.67 billion in March 2026, contributing to a projected annual deficit of $240.73 billion for fiscal year 2025-26. Gold imports account for nearly 9% of this total import bill. The increased demand for dollars to finance these imports places further downward pressure on the Indian rupee, which is already one of Asia's weakest currencies. Historically, substantial gold imports have correlated with significant rupee devaluation and depletion of foreign exchange reserves.
Domestic demand patterns are also shifting. In the first quarter of 2026, gold jewellery consumption fell by 19% year-on-year, largely due to prices being 81% higher than the previous year. Consumers are increasingly pivoting towards investment avenues such as gold bars, coins, and ETFs, with investment demand now surpassing jewellery consumption for the first time. India's overall gold demand is forecast to fall to a five-year low of 600-700 metric tons in 2026.
The decision to resume gold imports, even with the added IGST burden, highlights a tension in economic management. Prime Minister Modi has publicly urged citizens to limit gold purchases to conserve foreign exchange reserves. However, the restart of bank imports suggests an underlying necessity to maintain supply, potentially at the cost of the nation's financial stability and balance of payments. India's structural reliance on gold imports, its second-largest import item after crude oil, creates ongoing vulnerability. The drain on foreign exchange reserves from these imports has historically led to currency crises and prompted significant government interventions, including duty hikes.
Jewellery businesses face higher sourcing costs and a shift in consumer preference towards lower-value products. The inability to fully pass on these increased costs to consumers will likely impact profit margins for these businesses. Looking ahead, India's gold demand is projected to remain subdued. The Indian rupee has performed poorly compared to regional peers like the Malaysian Ringgit and Chinese Yuan. Continued pressure on the rupee and the trade deficit will likely remain key concerns for policymakers and investors navigating these balance of payments challenges.