The Indian market has implemented a significant tightening of gold import policies. In May, India's gold import duty was sharply increased by 9 percentage points, rising from 6% to 15%, marking the largest historical hike. Concurrently, related regulatory measures have been further tightened.
Against a backdrop of weak gold demand and ample supply, domestic gold prices in India have not fully reflected the impact of the tax increase. Local market gold prices are at a deep discount compared to landed prices.
Although official imports have remained relatively resilient, inflows of gold through unofficial channels are expected to increase.
India's gold demand is projected to slow down by 2026. Demand for gold jewelry, bars, and coins is forecast to decrease by 50-60 tonnes, representing a year-on-year decline of approximately 10%.
India's Gold Import Policy Tightening
Amid persistently rising external geopolitical uncertainty and sustained pressure on the Indian Rupee, the Indian government has implemented a series of measures aimed at maintaining foreign exchange reserve stability.
These measures include raising the gold import duty to 15%, tightening regulations associated with gold imports, urging consumers to avoid purchasing gold over the next year, delaying the issuance of annual physical gold import licenses to banks, restricting imports of various forms of gold, silver, platinum jewelry, and platinum alloys, and postponing notifications for banks regarding exemptions from the Integrated Goods and Services Tax (IGST).
Historical Pattern of Gold Import Duty Adjustments
Historically, adjustments to India's gold import duty have not been frequent, with long periods of stability between policy changes. Since 2019, however, the frequency and magnitude of duty adjustments have increased, reflecting that Indian authorities are now more actively using import duties to regulate overall trade dynamics.
Local Gold Price Reaction to the Duty Hike
The import duty increase led to a 4% rise in domestic Indian gold prices, which remains lower than the 9% duty hike. This discrepancy can be attributed to a lag in the adjustment of physical gold prices, the market being in a seasonally weak demand period, ample supply from jewelry trade-ins, and the possibility of concentrated, advanced arrivals of imports.
Domestic Price Discount to International Benchmarks
Shortly after the duty increase, the discount of domestic Indian gold prices compared to international prices widened from an average of $14 per ounce to nearly $150 per ounce. Two primary reasons are cited: a sharp short-term increase in local supply due to the clearance of previously backlogged imports, profit-taking sales by local investors, increased jewelry trade-ins, and jewelers releasing significant inventory at relatively low prices to attract buyers; and weakened market expectations for future Indian gold demand due to the duty hike, with the short-term oversupply situation exacerbating the discount, a pattern observed in previous duty increases.
Market Reaction After the Duty Adjustment
Following the import duty hike, share prices of listed jewelry retailers in India fell by approximately 2% to 17%, reflecting market expectations of weakening gold consumption demand. Overall, despite some instances of panic buying, total demand remained weak, constrained by both the off-season and the new duty.
The impact varies across different market segments: large chain stores experienced some panic buying, and while future jewelry sales are expected to slow, they are anticipated to show resilience due to inventory buffers and sustained demand from weddings and other essential occasions. Medium-sized and regional retailers continue to see purchases from high-net-worth clients but are expected to rely more on trade-in programs and accelerate inventory turnover. Small retailers, already struggling under persistently high gold prices, now face dual pressures on sales volume and profit margins.
Import Duty and Unofficial Imports
A stable correlation exists between import duty levels and unofficial gold inflows: duty hikes lead to increased unofficial inflows, while duty reductions lead to decreased inflows. The logic is that higher import duties widen the price differential between domestic and international gold, enhancing the incentive for unofficial imports, whereas lower duties diminish this attractiveness.
Limited Sensitivity of Gold Import Volumes to Duty Adjustments
Over the past 13 years, across different duty levels ranging from 6% to 15%, official gold import volumes have remained largely resilient for most periods. This indicates that import duty is not the key determinant of India's gold imports; overall demand conditions play a more significant role.
Recent data also highlights the resilience of Indian gold imports. In April, the value of gold imports surged to $5.6 billion, representing year-on-year and month-on-month growth exceeding 80%. This import growth was primarily driven by gold refiners, influenced by the Akshaya Tritiya festival, a retreat in gold prices leading to increased purchases of gold-silver alloys, sustained pressure on the Indian Rupee from prolonged Iran-Israel tensions, high oil prices, and a large import bill. The possibility of some advanced import arrivals cannot be ruled out.
Potential Slowdown in Indian Gold Demand Due to Duty Adjustment
Beyond factors like gold prices, income growth, and inflation, gold import duties influence gold consumption. Higher import duties are typically accompanied by a slowdown in demand.
Econometric modeling suggests the impact of changes in gold import duty varies for different product categories. Investment demand, such as for bars and coins, is more sensitive. Jewelry demand demonstrates stronger resilience. Jewelry consumption is more significantly affected by price and inflation, with import duty playing a relatively smaller role, likely because jewelry purchases are often necessity-driven, especially for weddings and social occasions. Investment demand is more influenced by income levels and import duties—higher duties and restrictions tend to suppress investment demand. In the short term, factors like inflation and rainfall also affect investment demand, in addition to duty.
Looking ahead to the full year 2026, influenced by the import duty hike, total demand for gold jewelry, bars, and coins in India is projected to decline by approximately 50-60 tonnes, a decrease of about 10% compared to the previous year. Gold prices, income, inflation, and monsoon conditions will further influence the trajectory of India's full-year gold demand.
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