Reforming gold trade

Source: The post “Reforming gold trade” has been created based on “Reforming gold trade”, published in “Indian Express” on 22nd June 2026.

UPSC Syllabus: GS 3 -Economy

Context: Gold imports exert pressure on India’s current account deficit and the rupee. In response to concerns over rising gold imports, several Asset Management Companies (AMCs) have imposed curbs on investments in Gold ETFs and gold fund-of-funds. However, such restrictions may be counterproductive from a macroeconomic perspective.

Reason behind curbs on Gold ETFs may be ineffective

1. Gold demand is driven by deep-rooted factors.
   1. Indian households purchase gold due to cultural traditions, social customs, and its role as a store of value.
   2. Therefore, restricting ETF investments is unlikely to significantly reduce overall demand for gold.
2. Gold ETFs provide a transparent and regulated investment avenue.
   1. Gold ETFs are subject to regulatory oversight and taxation.
   2. They offer investors a safer alternative to jewellery, bars, coins, and unregulated digital gold products.
3. Restrictions can lead to ETF mispricing.
   1. Large investors play an important role in aligning ETF market prices with their Net Asset Value (NAV) through arbitrage.
   2. Restrictions on direct purchases from AMCs may widen premiums and discounts, resulting in inefficient price discovery and speculation.
4. Gold ETFs contribute only a small share of total gold demand.
   1. Gold ETF demand was less than 20 tonnes in the January–March quarter of 2026.
   2. In comparison, demand for gold bars and coins reached 62 tonnes, while jewellery demand stood at 66 tonnes.
   3. Thus, physical gold demand is the primary driver of rising imports.
5. ETF demand is already moderating.
   1. Falling gold prices led to net outflows from Gold ETFs in May 2026 after a prolonged period of inflows.
   2. This suggests that market forces were already reducing ETF demand.

Way Forward

1. The government should focus on reducing demand for physical gold rather than restricting regulated financial products.
2. Measures should be taken to mobilise and recycle the large stock of gold held by households.
3. Greater promotion of financial instruments linked to gold can reduce reliance on physical gold imports.

Conclusion: Restricting Gold ETFs may distort markets without significantly reducing gold imports. A more effective strategy would be to encourage investment through regulated financial channels and promote recycling of India’s vast physical gold holdings to ease pressure on imports and the rupee.

Question: Restricting investments in Gold ETFs is not an effective solution to India’s rising gold import bill. Examine.

Source: Business Line