Gold’s stunning rally, which has driven global prices close to $4,000 per ounce, has left India facing a complex equation. According to a new report by SBI Research, while the value of the Reserve Bank’s gold holdings has surged, domestic demand has weakened, and imports continue to dominate supply. However, it also increased the government’s losses on Sovereign Gold Bonds (SGBs), showing how rising prices have created economic strain despite record valuations.
Prices rise, demand falls, dependency deepens
The report, titled “Coming of (a Turbulent) Age: The Great Global Gold Rush,” noted that gold prices have climbed over 50% year-to-date in 2025, driven by geopolitical tensions and a weaker dollar. As a result, the RBI’s gold reserves now around 880 tonnes have gained in value, rising $27 billion in FY26 after a $25 billion increase in FY25.
However, the rally has dampened consumer appetite. India’s gold demand fell 16% year-on-year (YoY) in Q3 2025, with jewellery sales dropping 31%, according to data cited from the World Gold Council. Despite this slowdown, India remained the world’s second-largest gold consumer, with 802.8 tonnes of demand in 2024, trailing only China.
Imports continued to bridge the gap. Even as new gold reserves have been identified in Odisha, Madhya Pradesh, and Andhra Pradesh, import dependency remained at 86% in 2024, the report said. Gold imports were valued at $26.5 billion (Rs 2.2 lakh crore) during April–September 2025, compared with $29 billion a year earlier.
The report added that the correlation between gold prices and the USD-INR exchange rate has strengthened to 73%, suggesting that every spike in bullion prices exerts downward pressure on the rupee.
SBI Research found that movements in global gold prices and the rupee’s exchange rate against the dollar are now 73% correlated.
This means that when gold prices rise, the rupee often weakens. Meanwhile, when gold prices fall, the rupee often strengthens.
One of the key highlights of the SBI Research report was the fiscal impact of rising gold prices on Sovereign Gold Bonds. Initially introduced in 2015–16 to curb physical gold demand and mobilise idle household holdings, the scheme has now become a costly liability for the government.
The redemption cost of SGBs has soared to Rs 1.59 lakh crore, while their issue value stood at Rs 65,885 crore, leading to a capital loss of Rs 93,284 crore for the exchequer, excluding interest payouts. The report attributed this loss entirely to the price escalation in recent years.
Financialisation of gold gains traction
Even as households cut back on jewellery purchases, Indians have increased their exposure to gold through financial instruments. Assets under management in gold exchange-traded funds (ETFs) reached Rs 90,136 crore in September 2025 a 165% rise YoY. Inflows into gold ETFs rose 2.6 times in FY26 compared with the previous year.
At the same time, gold-backed lending by scheduled commercial banks has expanded sharply, reaching Rs 3.06 lakh crore by March 2025. Around 80% of these loans originate from southern states such as Tamil Nadu and Karnataka, where they are commonly used for short-term farm and retail credit.
The RBI’s new Lending Against Gold Collateral Directions, 2025, now cap loan-to-value ratios at 85% for small loans and 75% for larger ones, with tighter repayment norms to curb risks.
How India mismeasures gold vs how China manages it
The report also draws attention to an accounting distortion in how India’s national accounts classify gold purchases. Household gold acquisitions are recorded as “valuables” under Gross Capital Formation (GCF), which, according to the report, inflates the investment rate while not indicating genuine savings or productive capital formation. SBI Research cited an earlier RBI working paper (2011) that termed this treatment “technically incorrect.”
In contrast, the report noted that China has developed a structured gold strategy, expanding central bank holdings, easing import regulations, and positioning itself as a global gold trading hub through institutions like the Shanghai Gold Exchange. India, meanwhile, remained dependent on imports and has yet to fully integrate gold into its broader financial system.
While record prices have boosted the paper value of official reserves, they have also weakened consumer demand, added fiscal costs through SGB redemptions, and reinforced dependence on imports. With gold prices and the rupee moving increasingly in tandem, the report suggests that the metal’s influence now extends beyond households to the broader financial system, linking global market shifts directly to India’s currency, reserves, and economic stability.
SBI Research concluded that gold is undergoing a structural transformation in its global and domestic role. The report described this phase as “gold’s vengeful return,” where the metal has shifted from being a passive store of value to an active financial asset held by central banks and investors as part of reserve management. It notes that while the rest of the world has redefined gold as a strategic financial asset, India continues to view it largely as a sentimental commodity.
