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. Prime Minister 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.
How Gold Imports Affect Forex and CAD
When India imports goods such as gold, it pays for them in dollars. The more a product is imported, the greater the requirement for dollars. This reduces foreign exchange reserves, leading to an appreciation of the dollar versus the 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 at PwC India, believes the government is giving an important nudge to citizens to reduce investments in this non-productive asset so that resources can be mobilized 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.
India's Gold Consumption and Imports
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. In 2025, India consumed about 800 tonnes of gold domestically, of which about 10-11% came from recycling and only about 1% from domestic production. The remaining 85-90% was imported. Total gold imports in 2024-25 were $58.0 billion and in 2025-26 $72.0 billion. A substantial part of imported gold is used for domestic consumption of gold-based jewellery. Import volumes of gold actually fell 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.
Expert Views on Gold's Macroeconomic Impact
Arun Singh, Global Chief Economist at Dun & Bradstreet, notes that 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. However, household gold purchases have a 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. Deepak Shenoy, CEO of Capitalmind Mutual Fund, analyzes that India's current account would be in surplus if one were to remove gold imports.
However, a percentage of the gold India imports is re-exported in the form of jewellery. About 40-42% of exports of gems and jewellery 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 are 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, from a peak of 16.8% in 2010-11 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.
Potential Forex Savings from 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's 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 but remains modest in the context of India's total import bill of about $754 billion. "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."
Gold prices have been rising in recent years, but demand has not dampened in the same proportion. Another challenge is that any reduction in volumes of gold can easily be offset by higher global gold prices and a weakening rupee. Experts also say that behavior 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 fiscal and monetary measures such as hiking the import duty on gold, mandating that a percentage of all imported gold be re-exported before new consignments can be brought in, or tweaks to the Loan-to-Value ratio on gold loans by the RBI.
DK Srivastava, Chief Policy Advisor at EY India, says a reduction in domestic consumption of gold may contribute marginally to saving foreign exchange. However, since 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 peaked at 25.4% in 2013-14, has fallen to about 22% in 2025-26. Within total exports, the share of 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 commodity composition. India may also strategize to make better use of its expanded list of free trade agreements.
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 behavior. 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.
