Gold may be a safe haven asset but India’s love for the yellow metal is adding pressure to its foreign exchange reserves buffer right now. PM Narendra Modi has called for people to look at ways to conserve the country’s foreign exchange by avoiding unnecessary gold purchases, overseas weddings and vacations. “If we make a few small changes for a year, we can save substantial foreign exchange,” PM Modi has said, urging people to put off buying gold for a year.India’s gold imports hit a record $71.98 billion in 2025-26, rising over 24% from $58 billion a year earlier. This was largely due to skyrocketing global gold prices, which have bumped up the value of imported gold.So, how do gold imports feed into the current account deficit, and have an impact on the foreign exchange reserves. The answer is simple: When India imports goods (such as gold), it pays for it in dollars. The more a product is imported (both in value and quantity), the more the requirement for dollars. This reduces the foreign exchange reserves, which in turn leads to an appreciation of the dollar versus rupee. The Current Account Deficit (CAD) also takes a hit when imports rise and exports do not rise in the same proportion.Ranen Banerjee, Partner and Leader, Economic Advisory Services, PwC India is of the view that the government is giving an important nudge to citizens to reduce their investments in this non-productive asset so that resources can be mobilised for more productive investments. “We hope that people listen to the call of the Prime Minister and reduce their jewellery purchases over time. The younger demography and their consumption choices could accelerate this trend over the next 3-5 years,” he tells TOI.
How much gold does India import & consume?
- India remains the world’s second-largest gold consumer after China, with demand largely driven by the jewellery sector and safe-haven buying during global uncertainty.
- India consumed domestically, in 2025, about 800 tonnes of gold of which about 10-11% was contributed by recycling of gold within the economy whereas domestic production contributed only about 1%.
- The rest of it, that is about 85-90%, was imported. Total imports of gold in 2024-25 were at$58.0 billion and in 2025-26 at $72.0 billion. A substantial part of imported gold is used for domestic consumption of gold-based jewellery.
- Import volumes of gold have actually fallen 4.76% to 721 tonnes, showing the surge was mainly due to sharply higher gold prices. Gold prices jumped from about $76,617 per kg in FY25 to nearly $99,825 per kg in FY26.
- Gold now accounts for more than 9% of India’s total imports, which stood at $775 billion in 2025-26.
- Rising gold imports are increasing pressure on India’s trade deficit, foreign exchange reserves, and current account deficit.
- India’s trade deficit widened to $333.2 billion in 2025-26 amid higher imports.
- The country’s current account deficit rose to $13.2 billion, or 1.3% of GDP, in the December quarter, according to Reserve Bank of India data.
As Arun Singh, Global Chief Economist at Dun & Bradstreet notes: The RBI has markedly increased gold’s share in its reserve mix, with gold accounting for 16.5% of total forex reserves in FY26, up from 5.1% in FY18. Household gold purchases, however, have a very different macroeconomic effect. Consumer demand translates directly into imports, creating immediate dollar outflows. With gold accounting for roughly 10–12% of India’s total import bill, it is a meaningful contributor to the current account and an eventual drain on the forex reserves, he explains. As Deepak Shenoy, CEO of Capitalmind Mutual Fund analyses: India’s current account would be in surplus, if one were to remove gold imports.However, it is important to note that a percentage of the gold that India imports is re-exported in the form of jewellery. About 40-42% of exports of gems and jewelleries are gold based. The contribution of gold in India’s gems and jewellery exports is second after diamonds. The exports of gems and jewellery as a group is an important contributor to India’s exports and thereby to the inflow of foreign exchange. The share of exports of gems and jewellery in India’s total exports has come down over time.This share was, at its peak, at 16.8% in 2010-11. This has come down to 6.4% in 2025-26. It may come down further in 2026-27 given the current global economic slowdown due to the ongoing West Asian crisis, according to an analysis by EY.
How much forex will India save by cutting gold imports?
Experts are divided on the extent of impact if gold consumption is reduced, especially in the absence of any measures to curb the yellow metal imports.Arun Singh estimates that a 10% reduction in gold imports can improve the current account by around 0.3% of GDP, offering some relief during periods of external pressure. Assuming gold prices remain around Q1 2026 levels, a 10% reduction in physical gold demand would translate into forex savings of roughly $13 billion per year. This is economically meaningful, particularly in years of external stress, but remains modest in the context of India’s total import bill of about $754 billion, he says.“More importantly, these savings are neither structural nor linear. They are highly sensitive to global bullion prices – periods of elevated prices can easily offset volume‑led gains. As a result, lower gold imports help smooth the external balance marginally, but do not materially alter India’s external accounts on their own,” he explains.“However, rupee dynamics are shaped by broader macro forces – crude oil prices, growth‑interest rate differentials, and the direction of capital flows. In this context, gold restraint functions as a supporting policy lever rather than a macro anchor. It can help dampen external volatility marginally, but on its own it cannot materially shift India’s exchange‑rate fundamentals,” he tells TOI.Gold prices have been rising in the last few years, but the demand has not dampened in the same proportion. Yet another challenge is that any reduction in volumes of gold can easily be offset by higher global gold prices and the weakening rupee. Experts also say that behaviour change takes time and one should not expect a sudden drop in gold consumption.Sachchidanand Shukla, Group Chief Economist at Larsen & Toubro (L&T) explains that in India, gold demand is generally price-inelastic, with a long-run price elasticity ranging between (-0.69) and (-1.01). However, the government can influence demand via some fiscal and monetary measures such as: hike in the import duty on gold; mandating that a percentage of all imported gold be re-exported before new consignments could be brought in; tweaks to the Loan-to-Value (LTV) ratio on gold loans by RBI.DK Srivastava, Chief Policy Advisor at EY India says that a reduction in domestic consumption of gold may contribute marginally to saving of foreign exchange. However, since the domestic consumption of gold may be both price inelastic and income inelastic, the reduction in domestic consumption following an increase in price or fall in income may have a limited impact on India’s current account deficit.“This is because the share of gold imports in total imports was in the range of 5-9% during 2022-23 to 2025-26. In 2025-26, this was at $72.0 billion of which about $60.0 billion is estimated to have been used for domestic consumption. It is the fall in this value which will contribute to improvement in the current account deficit. This fall which may be about 10% would amount to a saving of about $6 billion. This would also marginally provide a cushion to India’s foreign exchange reserves and the pressure on the exchange rate,” he tells TOI.According to Srivastava, the challenge in managing India’s current account deficit is that the share of exports in nominal GDP which had peaked in 2013-14 at 25.4% has fallen to about 22% in 2025-26.Within these total exports, the share of exports in gems and jewellery has fallen further. A reversal of these trends would require either an increase in global growth so that demand for India’s exports can increase or a change in the structure of India’s exports in terms of its commodity composition. India may also strategize to make better use of its expanded list of free trade agreements, he says.For Madan Sabnavis, Chief economist at Bank of Baroda, any cut in gold consumption will be dependent on government measures.“Having a total ban or even quotas will spook markets and create an illegal channel. Higher duty is the best way out as those who are price conscious will buy less gold,” he tells TOI.“However, the other main buyer of gold is ETFs. This segment will not be sensitive to price because it gets added to the NAV. Developing alternatives like Sovereign Gold Bonds is a good option for those who want to gain but not keen on owning the metal. All these measures will work in the short run when price is high. Once there is a correction, then it will be back to normal.As experts note, in India gold consumption is not just about an investment anchor in the portfolio, but a deep‑rooted social and financial behaviour. Hence, its demand is relatively inelastic. Any nudge by the government to reduce gold purchases may not yield immediate results, and even if it does, the impact may be limited. “Policy interventions can influence how people hold gold, but not why they demand it. As a result, any meaningful adjustment can only occur at the investment margin. On current structure, a 10% reduction – roughly 80 tonnes – appears realistic over the medium term. Sharper cuts would require sustained, trusted alternatives delivering positive real returns, not incremental policy nudges,” says Arun Singh of Dun & Bradstreet.However, in an effort to keep a comfortable forex reserves cover in place, small steps like putting off non-essential gold purchases and foreign travel would add weight. In the coming days, policy steps to preserve forex reserves and increase inflows are expected.
