'Indians Are Not Buying Too Much Of Gold'

'Even last year, when India bought gold, the physical quantity was much less than the previous years.'

Kindly note that this image has been posted only for representational purposes.

Photograph: ANI Photo

The war on Iran that started on February 28 could not have come at a worse time for India which was already reeling under economic difficulties, with corporate profits dipping and Foreign Institutional Investors pulling out of Indian stock markets.

Key Points

'Appeals create psychosis that gold supply in the domestic market will reduce and therefore the prices will go up. Today, the price of gold is higher than before when PM Modi made an appeal not to buy gold.'
'Now if your growth is down, your rupee is depreciating, if your fiscal deficit is rising, then the next thing that will happen will be inflation which will shoot up.'
'Is this the right way to reduce the demand for gold? Banning will lead to smuggling of gold or other illegal activities. It has failed in the past.'

On Sunday, May 10, 2026, Prime Minister Narendra Modi asked Indians to adopt economic austerity in the wake of uncertain global economic conditions due to the US-Israel war against Iran.

On top of this, the blockage of the Strait of Hormuz by Iran has brought the oil and gas supply to India to a virtual halt, creating further economic crisis.

Modi issued a 7 point appeal to Indians urging austerity in consumption of fuel and edible oils, as well as curbing foreign travel, attributing it to the looming economic distress over the Iran war.

On Friday morning the government followed it up BY raising the price of petrol and diesel by Rs 3 each.

In this worrisome scenario, what needs to be done?

Syed Firdaus Ashraf/Rediff asks former Union finance secretary Subhash Chandra Garg on what is the way forward for India to come out of this economic crisis, and why India landed in such a bad state.

You mentioned in one of your tweets that the stock markets have been bleeding for 20 months. What did we do wrong to land in this situation?

The stock market primarily depends on three major factors, be it upward movement or downward movement, and the number one factor is corporate profitability.

If corporate group profitability is visible for the future then everyone wants to buy that stock. But what we are seeing in the case of India for the last 7, 8 quarters, corporate profitability has come down. At this moment it is very low.

The second problem is certain companies which gave good profits like the IT sector, petroleum companies and others, their expectations of future profits too is very low. So the stock markets in India are not seeing vigorous purchases.

The third thing that drives the stock market is the supply of money. The big supply (of money) to Indian markets come from three basic sources. Foreign Portfolio Investors who were buying big in the Indian growth story. But for the last seven quarters they have turned very pessimistic about India. They have turned pessimistic not only for corporate profitability but also for the fact that the Indian rupee is coming under great pressure.

Last year the rupee depreciated by 11 percent. This year it has depreciated further by 5 percent or so. And if the Indian stock markets give returns and dividends of 2 percent or so and capital gains in negative, the FPIs' total returns turn highly negative.

Second basic thing that kept boosting the stock market from the supply side was SIP (Systematic Investment Planning) money. And since they were getting good returns (external link) they were investing (heavily) and so were mutual funds. Now at this moment they are short of liquidity (external link).

Now if your growth is down, your rupee is depreciating, if your fiscal deficit is rising, then the next thing that will happen will be inflation which will shoot up.

As it happened on Thursday, the wholesale Price Index has surged to a 42 month high of 8.3 percent in April (up sharply from 3.88 percent from March).

All these things combined make the Indian stock markets behave the way they are behaving.

Since the outbreak of the Iran conflict on February 28, India's forex reserves have declined by nearly $38 billion. Is that such a huge concern?

The forex reserves of India is (around) $700 billion. We are not in a 1991 (balance of payment crisis) kind of situation.

$700 billion is fairly good foreign exchange reserves but what we have done in our country is that 20 percent of this reserve is in gold (external link) only.

And this gold cannot be used for payments. Therefore, the usable reserve available is much smaller.

Secondly, we have always been in current account deficit but capital account (surplus) has been making up for our problems in forex situations, but now capital account (surplus) is also creating problems because of FPIs.

(NOTE: CAS is bigger than CAD, implying more dollars are coming in than going out and India adds to its forex reserves. This is technically called a Balance of Payment Surplus.).

Indian companies which used to borrow outside in the form of ECBs (External Commercial Borrowings) are not borrowing because their cost of borrowing is also going up.

All these factors have made the forex situation vulnerable.

On top of that there is an inclination, which is a mindset issue, that the Reserve Bank of India even in this kind of difficult situation does not want to use forex (reserves to stabilise the rupee). They could have used $100 billion to increase the supply of dollars in the market.

You mean the RBI should have pumped in $100 billion to make the rupee strong against the dollar?

You need not defend the rupee, but clear the imbalances.

If there is more dollar demand, if FPIs are going out or if payments have to be made, then the dollar supply in the market goes down.

The RBI then needs to supply dollars and if you are prepared to supply then the market remains very normal and the rupee does not depreciate. But then, if you don't want to supply you land up in a situation where the rupee depreciates.

But should not the market decide the state of the rupee rather than the government intervening and artificially jacking up the rupee value to dollar?

This is an obnoxious question in our system.

What is the market determined value for the rupee? The market value, as I said earlier, is about the supply of dollar and the demand for the dollar.

If there is a perception in the market that the supply of dollar is constrained and the demand is higher for whatever reasons for paying for oil or FPIs going out or things like that. If you restore the balance of supply and demand in the market the rupee will be at the market rate but if you don't do it then the rupee value will not be at the market rate.

So it is the duty of the RBI to see that the supply and demand of dollars in India remains stable. That is what RBI needs to do.

Many times they do the other way round. There are lots of dollars coming into the economy, the demand for the dollar is less and the rupee appreciates, those times are there and that time the RBI needs to intervene.

You got to buy the dollar to see that the balance of the dollar-rupee is normal. You cannot allow the rupee to find its value with the artificially created imbalance created in the demand and supply world.

In P Chidambaram told Indians not to buy gold because it was putting pressure on the rupee. Modi is doing the same thing now. Gold import was worth $35.01 billion in FY23 and that has gone up to $71.97 billion in FY26.
What has led to this sudden spurt in import of gold?

Indians are not buying too much of gold. Even last year, when India bought gold, the physical quantity was much less than the previous years.

Every year Indians buy on an average 700 to 800 tonnes of gold. That is the average. In 2025-2026 we bought 795 tonnes of gold but since international prices of gold went up sharply the import bill went up sharply.

Now the critical question, whether PM Modi makes an appeal or you increase import duty like the government did on Wednesday to 15 percent or you ban it physically by stating you cannot import gold as it happened in the past. All these measures the government can take to reduce the supply of gold.

Now, my view: Is this the right way to reduce the demand for gold? Banning will lead to smuggling of gold or other illegal activities. It has failed in the past.

Import duty acts the other way. We do not understand the commercial way. I need to actually check since PM Modi made the appeal the gold purchase in the domestic market has increased but not decreased.

Appeals create psychosis that gold supply in the domestic market will reduce and therefore prices will go up. Today, the price of gold is higher than before when PM Modi made an appeal not to buy gold.

By doing this appeal the government has actually increased the price of gold in the domestic market. People will feel better that their gold price has gone up. I don't think this will work as demand for gold will reduce.

What needs to be done then?

We need to bring in a Sovereign Gold Bond kind of scheme again where people can play in gold. This is the reason people buy gold (as they believe the price of gold will increase in future).

What the government can do differently from the previous SGB is that they need not pay any interest.

Second thing the government can do is that whatever people invest in sovereign gold bonds, that much money which comes to the government, it then should buy that much gold from the RBI. So the government too does not suffer any loss on gold value later on.

Third thing the RBI, instead of buying gold in the international market as it bought gold worth 200 to 250 tonnes in the last 2-3 years, should stop buying and buy only equivalent to what comes into the sovereign gold bond scheme.

You should give the option to people to play on the gold price. Create the scheme in such a way that it does not result in import of gold. It creates a system within the country and only then you can control the demand of the import of gold and not the way which the government is doing right now.

Are we are going to see a recession for the next three years?

All those underlining factors are not going to change because of the policies of the government.

Let us take the example of Foreign Direct Investment which brings a lot of capital inflow by creating stable conditions for the foreign exchange market.

Now, the government has locked in a very bad FDI policy. The biggest element of it is that today, whether it is for energy transition or whether it is for electric vehicles or computers, both the technology and investments are from China (external link).

The 1950, '60s and '70s world when the investment and technology were coming from western countries is long gone.

And if we don't want any investment and technology to come from China and instead we prefer to buy goods from China directly, which results in a huge trade deficit with them, things will not change for a couple of years. The effect of this bad policy will continue on the Indian economy.

There is policy paralysis and our vulnerability will not get addressed.

Part 2: 'In India politics has taken over business'