Gold, the dollar and the rupee
Bivash Modi
(modi.bivash@yahoo.in)
India’s relationship with gold is deeply emotional, cultural and financial. From weddings and festivals to family savings, gold has always occupied a special place in Indian society. Yet, behind this glitter lies a serious economic question: can excessive gold imports weaken India’s economy?
India is among the world’s largest importers of gold because domestic production is negligible. Almost all gold is purchased from abroad by paying in US dollars. This directly affects India’s Balance of Payments (BoP) and the Current Account Deficit (CAD)—the gap between what India earns from exports and what it spends on imports.
Recent figures explain the concern. India spent nearly 84 billion dollars on gold and silver imports during 2025-26.
In some months, surging gold imports sharply widened the trade deficit. Reuters reported that India’s merchandise trade deficit touched a record 41.68 billion dollars in October 2025, partly because of rising gold imports.
The economic mechanism is simple. When India imports more gold, importers require more dollars for payment. Demand for dollars rises while demand for rupees weakens. As a result, the rupee depreciates. The rupee recently crossed Rs. 95 per dollar amid rising oil prices, global uncertainty, and pressure from gold imports.
A weaker rupee creates a chain reaction across the economy. Since India imports crude oil, electronics, fertilizers and machinery, their prices rise when the rupee falls. Fuel prices increase transport expenses, which eventually raise the prices of food and essential commodities. Inflation rises and ordinary households feel the burden.
This scenario explains why the prime minister recently appealed to citizens to reduce non-essential imports and postpone excessive gold purchases. The government also increased import duty on gold and silver from 6% to 15% to protect foreign exchange reserves and stabilise the rupee.
However, there is another side to the debate.
One school of thought argues that restricting gold purchases may hurt India’s jewellery sector, which is a major export industry employing millions of artisans and workers. India exports jewellery worth over 11 billion dollars in 2025–26.
Supporters of this view believe that instead of discouraging gold consumption, India should focus on becoming a global jewellery manufacturing and export hub with higher value addition.
Another school of thought criticises governments for reacting only when economic stress appears instead of building a long-term policy framework. Critics argue that India has known for decades that oil and gold are its greatest import burdens. Yet structural reforms, such as boosting manufacturing, deepening export competitiveness, expanding domestic mining, and increasing financial literacy, have progressed slowly.
Historical experience supports this concern. During the 1991 balance of payments crisis, India’s foreign exchange reserves had fallen to levels sufficient for only a few weeks of imports. India even had to pledge gold reserves to raise emergency foreign currency. That crisis triggered major economic reforms.
Today, however, the situation is far stronger. India’s Forex reserves remain around 690 billion dollars, among the highest in the world. Economists therefore believe that panic is unwarranted, although caution is essential.
It’s crucial to understand the significant difference between household gold imports and the gold reserves held by the RBI. Household gold imports lead to dollar outflow without directly increasing productive capacity. But RBI’s gold reserves act as a financial safety cushion. In fact, the share of gold in India’s Forex reserves has doubled in four years, rising from about 5.9% in 2021 to nearly 11.7% in 2025. RBI now holds nearly 880 tonnes of gold.
Central banks across the world are increasing gold holdings because gold remains a trusted asset during geopolitical and currency uncertainty.
The rupee’s gradual depreciation is somewhat normal. In 2000, one dollar was around Rs 45. Today it is above Rs 95. Inflation differentials, global capital flows, oil dependence and stronger dollar demand all contribute to this long-term movement. A moderately weaker rupee can even help Indian exports remain competitive globally. The real concern is not temporary depreciation, but trade deficits, rising inflation, and overdependence on imports. India’s long-term economic stability will depend on increasing exports, strengthening manufacturing, reducing avoidable imports and maintaining adequate forex reserves.
Gold will continue to remain emotionally valuable for Indians. But economically, the challenge is to balance cultural preferences with national financial stability. That balance — rather than panic or restriction — is the real policy test before India today.