The attention of India’s policy makers has unquestionably shifted towards taking any measure to reduce the import bill, which has been mounting due to rising crude oil prices and a 13-month-high retail inflation.
With foreign capital outflows from India surging to ₹2.62 lakh crore in just the first five months of 2026, the rupee has fallen to a record intraday low of 95.71 on Wednesday. With the demand for dollars on the rise, Prime Minister Narendra Modi has now signalled for voluntary austerity measures which would reduce the need for fuel and help save foreign exchange.
The government on Wednesday has sharply hiked import duties on gold and silver to 15% from an earlier 6%. But as seen in the past, the demand for gold has rarely fallen sharply after such measures. We could see a short level of profit taking after which buying could sustain, experts say.
Going back to 2022, 2019 and even 2013, the government has hiked the import duty on gold, often seen to reduce a rising current account deficit and a weakening rupee.
Are we re-visiting 2013?
Economically, India is not as badly placed as 2013, but we certainty do not want to be getting there soon. The current account deficit is at 1.3% of GDP as of March, according to Crisil, compared to 4.9% of GDP in FY13; forex reserves are at $690 billion in early May compared to $292 billion in FY13, according to the Ministry of Finance’s Economic Survey. The short-term debt import cover is at 11 months, compared to 7.5 months in 2013.
A well-known economist at a bank suggests that India’s economic concern is less about the current account crisis, but more a capital account crisis. “Why are steps not being taken to capital inflows?” he told Fortune India, declining to be named.
Foreign capital outflows from India – at ₹2.62 lakh crore in calendar year 2026 – is already nearing the total outflows of ₹2.98 lakh crore seen in 2025. FII ownership in
Indian equities dropped to a 14-year low of 14.7% in April 2026, its lowest level since June 2012, according to a JM Financial research report.
And as the West Asia war continues, India will start to see the actual impact. Veteran banker and founder of Kotak Mahindra Bank, Uday Kotak on Tuesday warned the public, at the CII Annual Business Summit, to be ready for the full impact of the West Asia war, in the form of an energy price transmission.
India has largely kept petrol and diesel prices under check for several months now, despite high crude oil, whose supply is scarce due to the West Asia war. This means India is already using its fiscal levers to shield consumers from the inflationary shock, which would come through the – now imminent — fuel price hike.
“But a petrol and diesel price hike means that growth will also go into a tailspin. If growth is to be sacrificed, how will even minimum capital inflows come?” the economist said. India’s economy expanded by 7.8% in the December 2025 ended quarter, driven by manufacturing and the services sector.
The Reserve Bank of India will then need to start hiking interest rates soon to curb rising inflation.
HSBC’s Aayushi Chaudhary, economist, India, Indonesia and Sri Lanka and Pranjul Bhandari, chief India economist expect India’s inflation to rise further and the Reserve Bank of India to start hiking rates, after keeping rates unchanged since its December 2025 policy meeting.
“Our model suggests that the El Niño/temperature channel can add 0.5 ppt to inflation over a year. Adding this to our estimates from the energy shock (including our assumption of a ₹6-7/litre rise in petrol and diesel prices), we expect headline inflation to average 5.6% in FY27. On this basis, we expect the RBI to deliver two rate hikes, over 4Q26 and 1Q27, taking the repo rate to 5.75%. “
“We are not forecasting a bigger rate hike than 50 basis points for now because (1) we believe the RBI will look through part of the inflation increase as temporary (given we forecast CPI inflation to asymptote towards 4% by March 2028), and (2) we believe growth will also fall meaningfully due to the twin shocks, and the RBI may have to be mindful of that,” the HSBC economists said.
Sakshi Gupta, principal economist at HDFC Bank said: “The external shock is quite significant. The situation is a classic oil price hike, weakening rupee, pressure on CAD and its financing. Inflation is likely to inch above 5%, with risk from elevated energy prices and weather related disruptions.”
“We are using our buffer on the fiscal side and on the forex side. The concern is will the buffer run out? Which is why there is a need to either attract more capital or conserve capital and cut back on our import bill if geopolitical tensions do not simmer down,” Gupta told Fortune India.
Shift to gold investments and ETFs
Gold and silver prices rose on Wednesday after the government announced the import duty hike. Gold June 5 futures prices at MCX Commodity Exchange of India rose 5.6% to ₹1,62,100 per 10 gm while silver June 3 futures prices rose 7.7% to ₹3,00,614 per kg.
Also shares of listed gold loan companies rose.
Manappuram Finance
closed up 6.05% to ₹310.95 and
Muthoot Finance
rose 5.12% to ₹3,525 at the BSE.
After the import hike, the Gem & Jewellery Export Promotion Council (GJEPC) presented a cautious tone to the government’s move. It warned that the move could impact micro- and small business enterprises (MSMEs) and lock up their working capital. It has also presented a few proposals to the government.
One proposal is a push towards lower caratage jewellery such as 14K and 9K products, which GJEPC estimates could reduce imports by 20-30%. The council also wants consumers to increasingly exchange old gold for new jewellery, revamp the Gold Monetisation Scheme to unlock India’s estimated 25,000 tonnes of idle household gold stock.
The World Gold Council, in their Q1 2026 gold demand report says that a structural shift in gold demand is becoming more pronounced [in India], with investment gaining momentum. Investment demand, across bars and coins and ETFs rose 54% year-on-year to 82 tonnes in Q1, offsetting weakness in jewellery demand.
“This shift is reflected in the demand mix: investment demand rose to nearly 70% of total demand in Q1, while jewellery’s share fell to around 30%, the lowest level in our data going back to year 2000,” the WGC report said.
Investment demand led growth, with volume up 54% year-on-year to 82 tonnes and value up 179% year-on-year, outpacing jewellery demand. Total gold demand for India in Q1 rose 10% year-on-year to 151 tonnes, although volumes remained 9% below their long-term average.
Discussing demand for gold ETFs after the import hike, Satish Dondapati, fund Manager (ETFs) at Kotak Mahindra Mutual Fund, said: “Many people will delay purchases at this stage. Bullion jewellery demand will be lower. From an investment perspective, over the medium to long term people will start buying ETFs again, after profit taking in the near-term.”
As an industry, India’s total AUM for gold ETFs is estimated at ₹1.80 lakh crore, of which Kotak’s share is around ₹14,500 lakh crore. Dondapati will advise clients to allocate about 15-20% of their portfolio towards gold and silver, at this stage, due to its safe haven characteristic, amid the war.
