Government Raises Gold Import Duty, Potential Boost to Gold Exchange-Traded Funds

Gold ETFs Surge 6.5% as India Raises Import Duty on Gold and Silver

The Indian stock market witnessed a significant surge in gold exchange-traded funds (ETFs) on Wednesday, May 13, closing up to 6.5% higher following the government's announcement to hike the import duty on gold and silver. The duty hike is aimed at curbing non-essential imports and conserving foreign exchange reserves, which have been strained by higher oil and fertiliser purchases amid the conflict in West Asia.

The government has sharply raised import tariffs on gold and silver to 15% from 6%, effective May 13. This move follows an appeal by Prime Minister Narendra Modi to defer gold purchases alongside unnecessary foreign travel for a year and conserve fuel to help the Indian rupee, which remains in a freefall amid weakening macros and relentless foreign investor selling.

India's gold import bill has surged to approximately $72 billion in FY26 from $58 billion last year, accounting for over 9% of total imports and significantly contributing to the trade deficit. While past duty hikes in 2022 from 10.75% to 15% have led to a 15-20% moderation in official imports, the current impact is likely to be more nuanced, according to experts.

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Following the import duty hike, gold prices on the Multi Commodity Exchange (MCX) rallied, and gold ETFs also surged. Gold traded at ₹162,491, up over ₹9,000 or almost 6% in the domestic futures market.

Anindya Banerjee, Head of Commodity and Currency Research at Kotak Securities, explained that the duty hike has resulted in a mechanical re-pricing to a new import parity, not a fundamental rally. The duty is now a fixed cost embedded in the price, and gold and silver in India will continue to be driven by the international London Bullion Market Association (LBMA) spot price, the USD/INR exchange rate, and the domestic premium or discount over import parity.

On the flip side, jewellery stocks took a hit, with Sky Gold dropping over 7% as customs duty increases raise fears of weakening demand. However, some stocks like Senco Gold and Titan Company bounced back and closed up to 3.7% in the green.

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Sachin Jasuja, Head of Equities and Founding Partner at Centricity WealthTech, noted that incremental physical demand may soften, particularly in price-sensitive segments, and imports could see marginal compression. "However, for unavoidable purchases such as weddings, consumers are likely to downtrade to lower purity jewellery (22K to 18K) or reduce ticket sizes rather than defer buying altogether," he added.

As visible from the latest price action, gold ETFs remain one of the top beneficiaries of the duty increase. Anoop Vijaykumar, Head of Equities & Fund Manager at Capitalmind AMC, shared past data signalling that gold ETFs generally take up to three days to reflect the duty change. This means that action in gold ETFs is likely this week, as well.

Moreover, gold and silver in India may temporarily outperform international prices due to the additional duty premium. However, the demand for jewellery may slow as higher prices may negatively impact wedding demand, retail jewellery purchases, and small-ticket buyers, said Ruchit Thakur, Market Analyst at VT Markets.

He rather expects inflows may occur, especially in price-sensitive markets like ETFs and digital gold. "Some investors may switch from physical jewellery to gold ETFs, silver ETFs, and digital bullion due to higher manufacturing fees and taxes." While the hike is good for gold ETFs, they may not be the ultimate beneficiaries.

ETFs carry structural advantages that the duty hike now sharpens — no making charges, no purity concerns, no storage cost, and clean tax treatment under the current rules. For the urban, investment-led buyer — the SIP-and-allocation cohort — the cost differential against physical gold becomes even more compelling, said Harshal Dasani, Business Head at INVasset PMS.

He expects a measurable acceleration in ETF flows over the next two to three quarters, alongside renewed interest in any future Sovereign Gold Bond tranches the government chooses to issue. That said, he added that physical gold's role in Indian households is primarily cultural and savings-led, not investment-led. "The two markets are coexisting, not competing."

The duty hike has resulted in an immediate price re-adjustment, effectively delivering a one-time ~7-8% mark-to-market gain for existing investors. According to Jasuja, ETFs remain a prudent route for investors seeking diversification, participation in the gold rally, and a hedge against macro and currency risks.