More than gold ETFs, it is surging bar and coin demand that has expanded India’s gold import bill in recent times
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After Prime Minister Narendra Modi’s appeal to citizens to cut back on their gold purchases to alleviate pressure on the rupee, several mutual funds (MFs) were quick to announce curbs on inflows into their gold MF products. Most AMCs (Asset Management Companies) have restricted direct purchases of ₹25 crore or more in their gold Exchange Traded Funds (ETFs), while some have capped fresh investments in their gold fund-of-funds as well.While these curbs may work as a symbolic gesture, preventing individual investors from owning gold through the MF route is a bad idea from a macro perspective. Households are unlikely to stop buying gold, thanks to deep-rooted cultural and practical factors. Of the various avenues to own gold, ETFs and MFs represent a more transparent and regulated route than jewellery, bars and coins or so-called digital gold. Curbs on ETF inflows are a bad idea for three reasons. One, in Indian markets, secondary market prices of ETFs often trade at large premiums or discounts to underlying portfolio value (NAV), resulting in investors ending up overpaying or underpaying for an asset. The mechanism that helps the secondary market prices of ETFs converge with the NAV is the availability of creation units. When market prices move to a discount below the NAV, large investors exchange assets in bulk with the AMC, for ETF units. When market prices move into a premium, they do the reverse. This helps align market prices of ETFs with the NAV. Restrictions on big-ticket investors buying gold ETFs directly from the AMC can interrupt this arbitrage and widen premiums or discounts on gold ETFs, triggering mispricing and speculation. Although AMCs have exempted authorised participants and market makers, the absence of other institutional investors can lead to mispricing of gold ETFs.Two, more than gold ETFs, it is surging bar and coin demand that has expanded India’s gold import bill in recent times. World Gold Council data suggest that in the January-March quarter of 2026, Indian demand for gold bars and coins at 62 tonnes nearly matched jewellery demand of 66 tonnes. Gold ETF demand amounted to less than 20 tonnes. Overall, Indian gold ETFs hold only about 116 tonnes of gold in aggregate, compared to the over 25,000 tonnes of physical gold that households are believed to own. Three, trends suggest that the demand for gold ETFs has begun to wane from May with the sharp fall in gold prices. May saw gold ETFs face net outflows of $61 million after 12 months of inflows.Overall, it is unlikely that patriotic reasons alone will stop Indians from buying gold. Therefore, it seems desirable that they buy gold through regulated vehicles such as ETFs where the holdings are transparently held and subject to taxes, rather than physical bars and coins. Gold ETFs allow retail investors to own gold without the caratage issues which are pervasive in bars, coins and jewellery. Imports are better curbed by finding a way to recycle the physical hoard of gold.Published on June 19, 2026
