The rapid fall of the rupee has forced policymakers to come up with some quick solutions, with Prime Minister Narendra Modi calling for austerity measures that reduce the need to expend foreign currency for imports. Then, the government also hiked the import duty on gold, silver, and platinum. But economists don’t expect this to move to meaningfully bring down the gold import bill.
“Historically, the effectiveness of gold import duty hikes in controlling imports has been mixed,” Nomura economists Sonal Varma and Aurodeep Nandi said on Wednesday. “When India raised duties to 10% in 2013, gold imports did decline initially, but gold smuggling increased to meet suppressed demand. More recently, the reduction of the duty to 6% was intended to curb smuggling and formalise the market.”
One possible solution the government may not implement is something it has previously deployed: Sovereign Gold Bonds (SGBs).
Launched in late 2015, the scheme was discontinued in early 2024 despite being an appealing investment opportunity for the public, who bought bonds equivalent to 147 tonnes of gold (worth Rs 72,275 crore). These bonds are now giving incredibly high returns to their holders of more than 200% of their life of eight years, and that is without taking into account the 2.5% interest and zero long-term capital gains tax on redemption.
So why was the scheme discontinued despite the obvious benefits for the public? Because the government felt it was having to pay too much.
Cost of saving forex
The logic of SGBs was sound: meet the investment demand for gold without importing the metal – all the government had to do was set aside money for interest payments and the market value of the bonds maturing in a year. However, the rationale for discontinuing the scheme had a different consideration: the cost of borrowing.
Any bond the government issues to an investor – be it banks, foreign investors, or individuals – is considered a borrowing.
“The recent global geo-political unrest has impacted gold prices significantly, increasing the cost of borrowing through SGBs,” the finance ministry told the Parliament in a written response to a question in July 2025. “The Government’s endeavour is to minimise the cost of borrowings and hence it is imperative for a prudent debt management strategy to carefully consider the above factor while deciding on offering new tranches of Sovereign Gold Bonds.”
But the SGBs were never intended to be a way to finance the government’s fiscal deficit.
Demand in SGBs only picked up pace after Covid struck, with roughly Rs 63,000 crore of these bonds being purchased from FY21 to FY24. Over these four years, the central government borrowed Rs 40 lakh crore on a net basis to help meet its annual fiscal deficits.
Yes, the scheme was expensive – the total annual interest outgo and redemption liability of SGBs issued from 2015 to 2024-25 was nearly Rs 18,000 crore. But it was hardly a make-or-break one for a government which is going to spend Rs 14 lakh crore in FY27 as interest on past debt.
If stopping the scheme was not enough, the FY27 Union Budget went one step further and said only those SGBs bought by someone and held until they matured eight years later were exempt from capital gains tax. This meant any gold bonds purchased in the secondary market – they are also traded on exchanges – will face capital gains tax at the time of maturity.
Rising investment demand
What the SGBs did was ease the strain on the import bill and reduce the need to spend the country’s foreign currency reserves.
Indians’ demand for gold is a structural weakness of the economy. While our inherent affection for the precious metal offers an easy diversification of savings, the lack of domestic supply means almost the entire demand has to be met via imports, which adversely impacts the trade balance. And we import a lot of gold: $72 billion in FY26, up 24% from FY25, or more than 700 tonnes. More than 9% of all our imports in FY26 were gold, with another 1.6% being silver.
In the absence of SGBs, Indians have gone the Exchange Traded Fund (ETF) route over the last year in a manner never seen before.
But gold ETFs – essentially mutual funds that invest in gold – require investments to be backed by gold holdings. In January 2026, for the first time ever, Indians invested more in gold ETFs than equity mutual funds: Rs 24,040 crore versus Rs 24,029 crore. This required these funds to import a record 15.52 tn of gold. ETF purchases that month accounted for 22% of all gold imports (Rs 1.1 lakh crore) in January. For silver ETFs, the figure was even larger: 52%.
According to the World Gold Council, there has been a “structural shift” in India’s gold demand, with investment demand making up nearly 70% of the total demand in January-March 2026, while the share of jewellery fell to around 30% – the lowest in at least 25 years.
Unless this investment demand for gold is met, imports – through ETFs and other routes – will continue and the rupee will keep weakening.
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