India Gold Market Slows as ETF Rules Shift

Indian bullion demand has moderated significantly following a steep import duty hike, driving a sharp contraction in gold imports and a record monthly outflow from domestic gold exchange-traded funds. Meanwhile, regulators are preparing to overhaul the commodity trading framework to align domestic prices more closely with global market movements.

Gold’s gains ease

International and domestic gold returns have softened compared to the historic peaks recorded in early 2026. By June 15, global and Indian gold values fell 4.2% and 3.7% respectively from the conclusion of May.

However, a clear divergence remains visible in year-to-date performance. While international prices are broadly flat, domestic values have climbed roughly 13.2%. This internal rally primarily reflects a 9.0% increase in the gold import duty implemented in mid-May, alongside a 5.3% depreciation of the Indian Rupee against the US Dollar.

Mounting anxieties over persistent inflation have fueled widespread market expectations that prominent central banks will implement stricter monetary policies. This shift has elevated the opportunity cost associated with holding non-yielding assets, placing downward pressure on gold returns.

Simultaneously, a broad improvement in broader investor risk sentiment and accelerating global ETF liquidations have diminished investment demand, leading to the softer pricing environment observed recently.

Deep discounts fade

Immediately following the mid-May tariff adjustment, domestic gold prices shifted into a profound discount relative to the official landed cost. This pricing gap widened dramatically, moving from a pre-hike average of $14 per ounce to nearly $150 per ounce immediately after the policy took effect.

This massive dislocation highlighted a severe supply-demand mismatch. The sudden spike in domestic prices triggered immediate profit-taking, which rapidly inflated local supply at a time when physical retail buying faced severe headwinds.

Two additional factors significantly boosted local liquidity. Bullion distributors aggressively liquidated inventories acquired prior to the tax increase, while a substantial volume of consumers exchanged older jewelry for updated designs.

By the second week of June, these deep discounts narrowed substantially, stabilizing near $25 per ounce by June 15. This correction indicates a swift normalization in physical supply dynamics, driven by a reduction in opportunistic selling and a modest recovery in buying from specific consumer segments.

Gold demand slows in off-season

Field feedback from major physical markets reveals that retail jewelry demand remained highly suppressed through May and early June. This naturally quiet seasonal window was further constrained by the Adhik Maas, an inauspicious period in the Hindu calendar that severely depressed retail footfall.

Heightened volatility in gold pricing also forced a cautious, watchful approach among buyers across multiple demographic segments. Industry contacts confirm that bar and coin physical investment demand stagnated completely, while the expansion of new retail outlets ground to a halt, mirroring the subdued sentiment across the bullion trade.

Market interactions indicate that the Prime Minister’s public request for citizens to restrict gold purchases successfully curtailed non-essential buying. This trend was especially pronounced across urban centers, though it had a negligible impact in rural regions where social media messaging has a lower penetration rate.

In response to this retail slowdown, jewelry retailers pivoted heavily toward old-gold exchange transactions to sustain volumes. Documented accounts reveal that the share of trade originating from recycled gold exchanges climbed between 5% and 15%, accounting for an astonishing 60% to 70% of total sales for select retail chains.

More recently, minor pockets of physical demand have emerged, stimulated by a modest price correction and growing consumer anticipation of subsequent government interventions aimed at curbing physical gold imports.

Looking ahead, institutional market participants anticipate that physical demand will remain weak through June and July. A broader recovery is expected to materialize in August as the traditional festive buying cycle commences.

Gold ETFs: flows reverse in May

Indian gold ETFs experienced a severe trend reversal in May, tracking a broader global liquidation trend. Domestic gold funds posted their first net monthly outflow since April 2025, with net redemptions hitting a historic high of INR 7.25 billion ($76 million).

Gross liquidations soared to an unprecedented INR 33.30 billion ($348 million), underscores the intensity of investor selling. Nevertheless, aggregate bullion holdings managed to remain steady at 116.5 tonnes, keeping total assets under management at INR 1.846 trillion ($19.3 billion).

This aggressive liquidation wave was driven by profit-taking after the 9% tariff hike pushed domestic spot prices and ETF tracking values sharply higher. Rupee-denominated gold values jumped 6% instantly after the tax announcement, prompting investors to capture short-term gains.

This behavior was heavily reflected in participant data, with active investor folios plunging by 134,343 in May—the most severe monthly drop on record—leaving total active accounts at 12.3 million. This massive liquidation suggests institutional and retail accounts actively used the price surge to reduce or exit exposure.

However, this capital flight proved temporary, as capital flows swung back into positive territory by early June. Domestic gold funds pulled in net inflows of INR 16.31 billion ($171 million) between June 1 and June 11, proving that structural investor interest remains robust.

Concurrently, multiple asset management companies enacted temporary restrictions on institutional-sized investments. Direct fund subscriptions were capped at INR 250 million (~$2.6 million), while lump-sum inflows into gold fund-of-funds were limited to INR 1 million (~$10.600) per unique tax identification number each calendar month.

While asset managers attributed these limits to prevailing economic conditions, the restrictions align with state anxieties over gold import volumes, current account imbalances, and currency volatility. Because corporate entities hold 58% of gold ETF assets, followed by high-net-worth individuals at 31% and retail buyers at 11%, these caps could temporarily suppress primary inflows, shifting institutional volume to the secondary market where market makers maintain liquidity.

Digital gold buying slows, interest holds

Electronic gold purchases executed via the Unified Payments Interface experienced a mild contraction in both transaction volume and value during May. Total transaction values slid 2% month-on-month to INR 24 billion ($256 million), while estimated physical volumes shrank 5% to 1.54 tonnes.

Although these figures sit substantially below the record peaks observed in January—representing a 38% decline in value and a 41% drop in volume—monthly operational velocity remained above the 16-month baseline of 1.36 tonnes. This indicates that digital fractional buying remains highly resilient, keeping gold among the top-tier transaction categories on the UPI network.

Duty hike dents gold imports

In the wake of the aggressive mid-May import duty hike from 6% to 15%, official gold imports tumbled 39% month-on-month to $3.4 billion, though this represented a 34% increase when measured year-on-year.

In terms of physical mass, monthly imports plummeted to an estimated range of 25 to 30 tonnes. This marks a steep decline from the 46 tonnes imported in April and sits far below the historical two-year monthly average of 59 tonnes, confirming that the higher tariff architecture successfully cooled inbound shipments.

Consequently, gold’s share of India‘s aggregate merchandise import bill moderated to roughly 5%. This marks a substantial contraction from the elevated 14% threshold recorded during the opening two months of the year, providing clear evidence of cooling macro demand.

Future Outlook

The domestic landscape for precious metal assets is poised for structural change as the market approaches the final quarter of 2026. While physical demand is structurally forecast to rebound in August due to the autumn wedding season, paper and electronic gold tracking instruments face an entirely new operational paradigm.

Beginning September 1, 2026, the Securities and Exchange Board of India will enforce a overhauled trading framework specifically targeting gold and silver ETFs. This intervention aims to resolve persistent opening price dislocations caused by overnight movements in global spot markets while Indian exchanges are dark.

By executing a mandatory pre-open call auction mechanism paired with an initial ±6% dynamic price band, the regulatory body intends to eliminate artificial premiums and discounts. Because SEBI will permit the price bands to expand in 3% increments with no upper limit during volatile sessions, institutional liquidity providers will gain unprecedented flexibility to discover fair values efficiently before regular market hours commence.

FAQs

Why did Indian gold ETF flows experience a record reversal in May 2026?

The historic net outflow of INR 7.25 billion was primarily triggered by rapid profit-taking. When the government raised the import duty to 15% in mid-May, local gold prices jumped 6% almost immediately, prompting investors to liquidate positions and lock in rapid gains.

How will SEBI’s new ETF trading rules affect investors starting September 1, 2026?

SEBI’s updated framework introduces a pre-open call auction and dynamic price bands starting at ±6% to align domestic ETF opening prices with overnight global commodity movements. This changes how gold and silver funds trade by minimizing morning pricing gaps and reducing artificial premiums or discounts.

Why did gold imports into India drop significantly in May?

Inbound gold shipments fell 39% month-on-month to $3.4 billion because of a sharp increase in the official import duty, which rose from 6% to 15% on May 13. This higher tax rate, combined with a seasonally quiet period, cooled import volumes down to an estimated 25-30 tonnes.

What role did old-gold exchanges play during the demand slowdown?

With high domestic prices and an inauspicious calendar period discouraging fresh retail purchases, jewelry retailers relied heavily on recycled gold. Old-gold exchanges increased by 5% to 15%, making up as much as 60% to 70% of total sales for certain retail operations.