The 1968 Gold Control Act intended to curb imports and save foreign exchange, but instead triggered a massive black market and damaged the traditional artisan sector. The policy's ultimate failure led to its 1990 repeal, marking a significant shift in how India manages its gold reserves today.
In 1968, the Indian government introduced the Gold (Control) Act with a clear economic goal: to curb gold imports, conserve foreign exchange reserves, and encourage citizens to keep savings in banks rather than as physical gold. The legislation included strict measures, such as limiting the purity of new jewelry to 14 karats—a major change from the traditional 22-karat standard—and placing heavy restrictions on private bullion ownership.
The Impact of Regulation
The government believed that by making the purchase and holding of gold more difficult, private wealth would naturally flow into the banking system to support national development. However, the policy failed to account for the deep cultural and financial role gold plays for Indian families, who view the metal as essential security and a store of value.
Consumers largely rejected the 14-karat limit, viewing it as an inferior product. This lack of demand devastated traditional goldsmiths, many of whom were forced to close their businesses due to licensing burdens and plummeting sales. As legal channels for high-purity gold were stifled, a massive illicit parallel economy emerged. Smuggling networks, particularly in cities like Bombay, flourished, moving pure gold bars from abroad. Because the legal market could not meet the demand, contraband gold often commanded premiums of 40% to 80% over international prices, demonstrating that the ban had failed to suppress the public's appetite for the metal.
Repeal and The 1991 Crisis
After 22 years of enforcement, the government recognized the systemic failure of the Gold (Control) Act, leading to its official repeal on June 6, 1990. The decision signaled a transition toward liberalization and an acknowledgment that criminalizing gold trade was counterproductive.
Just a year later, India faced a severe balance-of-payments crisis. With foreign exchange reserves at critical lows, the Reserve Bank of India (RBI) engaged in a historic and discreet operation, airlifting 46.91 tonnes of gold to international vaults in London to secure emergency funding. This action provided the necessary financial cushion for India to initiate major economic reforms, including the devaluation of the rupee and broader trade opening.
A Shift in Strategic Reserve Policy
Since that period of crisis, India’s strategic stance on gold has evolved significantly. Instead of attempting to limit private ownership, the central bank has focused on building its own gold reserves. By May 2026, the RBI’s gold holdings reached approximately 880.52 tonnes.
Gold now plays a vital role in India's foreign exchange management, with its share of total reserves rising to 16.85% as of May 2026, up from 13.92% in September 2025. This buildup highlights a shift from the restrictive policies of the late 1960s to a modern strategy of using gold as a buffer against economic instability and global market volatility. For analysts and observers of the macro economy, this evolution reflects the lesson that restrictive gold policies often lead to informal, unregulated markets rather than the intended economic outcomes.