India’s Love for Gold: How Gold ETFs Are Shaping Household Savings and the Economy

Summary

• Indian households are shifting part of their savings from bank deposits and equity mutual funds to gold, especially via Gold Exchange-Traded Funds (ETFs).
• Gold ETF inflows hit a record high in January 2026, even surpassing equity mutual fund inflows for the first time in a month.
• This surge in financial investments in gold is contributing significantly to higher gold imports and widening India’s trade deficit.
• The earlier Sovereign Gold Bond (SGB) scheme had helped curb gold imports but was discontinued in 2024 due to rising fiscal costs.
• Policymakers now face the challenge of balancing households’ preference for gold with macroeconomic stability, possibly by reviving or redesigning gold- and silver-linked schemes.

1. Changing Pattern of Household Savings

1.1 Shift from Bank Deposits to Market Instruments

• Bank deposits losing share:
  • 2022–23: Bank deposits = 35% of households’ financial assets.
  • 2024–25: Bank deposits = 33% of households’ financial assets.
• Rise of mutual funds and equity:
  • 2022–23: Mutual fund and equity investments = 7% of financial assets.
  • 2024–25: Mutual fund and equity investments = 15% (more than doubled).
• Bankers’ concern: Slower deposit growth could affect banks’ ability to fund credit growth and support the broader economy.

1.2 Gold: The Constant Favourite

• Unchanged love for gold: While the form of savings is changing, households’ preference for gold as an asset remains strong.
• Key change: The route to gold investment is shifting from physical gold to financial products like ETFs.

2. What Are Gold ETFs and How Do They Work?

2.1 Basic Structure

• Gold ETFs = Mutual funds that invest in gold:
  • They are traded on stock exchanges like shares.
  • The fund buys physical gold corresponding to investor inflows.

2.2 Why Households Prefer Gold ETFs Over Physical Gold

• No purity worries: Investors avoid the risk of buying impure or under-carat gold.
• No storage and security issues: No need for lockers or insurance against theft.
• Low ticket size: Investors can buy very small units instead of full coins or bars.
• High liquidity: Units can be bought and sold on exchanges during market hours.

3. Record Surge in Gold ETF Investments

3.1 Historic Inflows in January 2026

• Gold ETF demand:
  • Gold ETFs bought a record 15.52 tonnes of gold in January 2026.
  • This was almost equal to the demand seen in the previous three months combined.
• Shift from equity mutual funds:
  • Net gold ETF inflows (Jan 2026): ₹24,040 crore (more than double December 2025).
  • Equity mutual fund inflows (Jan 2026): ₹24,029 crore (down 14% from December).
  • First time: In any month, households invested more in gold ETFs than in equity mutual funds.

3.2 Link with Gold and Silver Imports

• Gold ETFs and imports:
  • Gold ETF inflows accounted for 22% of total gold imports in January (₹1.1 lakh crore).
• Silver ETFs and imports:
  • Silver ETF inflows made up 52% of silver imports (₹18,194 crore).
• Implication: Financialisation of gold (through ETFs) is now a major driver of precious metal imports.

4. What Is Driving This Rush to Gold?

4.1 Speculation vs. Safety

• Analysts’ view (Kotak Institutional Equities):
  • The surge in gold and silver ETF investments globally may indicate “massive speculation”.
  • Uncertainty remains whether this is:
  • (a) A substitute for traditional demand for physical gold, or
  • (b) A sign of loss of confidence in the modern monetary system.
  • Analysts lean towards (a), as (b) would reflect a deep systemic concern.

4.2 Historical Parallel: Post-2008 Crisis

• After the 2008 global financial crisis:
  • India faced high domestic inflation.
  • The rupee weakened sharply.
  • Economic growth slowed.
• Household behaviour then:
  • Loss of confidence in formal savings instruments.
  • Sharp rise in gold imports as households turned to gold as a store of value.
• Policy response:
  • Government and RBI imposed measures to curb free import of gold.
  • New schemes were introduced to divert savings away from physical gold.

5. Sovereign Gold Bonds (SGBs): A Missed Opportunity?

5.1 Design and Benefits of SGBs

• Launched: Late 2015.
• Key features:
  • Provided exposure to gold prices.
  • Offered a fixed interest rate of 2.5% per annum.
  • No need for the government to import physical gold; only required budgetary outgo for interest and redemption.
• Impact:
  • Indians bought SGBs equivalent to 147 tonnes of gold.
  • Total value: ₹72,274 crore over the life of the scheme.
  • Effectively reduced gold imports by that amount.

5.2 Why SGBs Were Discontinued

• Rising fiscal burden:
  • Rapidly increasing gold prices made SGBs costly for the government.
  • Annual outgo for interest and redemption reached nearly ₹18,000 crore.
• Discontinuation:
  • The SGB scheme was stopped in early 2024.
  • This removed a key non-import-based avenue for gold investment.

6. Macroeconomic Concerns: Gold as Capital Outflow

6.1 Gold Purchases as De facto Capital Exports

• Analysts’ warning:
  • Large-scale purchases of financial and physical gold by households are “tantamount to exports of capital from the country”.
  • Money that could fund domestic investment and growth is effectively parked in an imported, non-productive asset.

6.2 Impact on Trade Deficit

• January 2026 trade numbers:
  • Gold imports tripled from December to reach $12.07 billion in January.
  • Rising investments in gold ETFs were a key driver of this surge.
  • India’s goods trade deficit widened to nearly $35 billion.
• Comparison:
  • Last higher deficit: October’s record $42 billion, partly due to festive (Diwali) gold demand.

7. Broader Context: Volatile World, Cautious Households

7.1 Global Uncertainty

• Recent trends:
  • Geopolitical conflicts and policy uncertainty worldwide.
  • Divergent stock market performance across countries.
  • Artificial Intelligence (AI) boom lifting some markets more than others.
• India’s equity markets:
  • Relatively lower AI exposure compared to some global peers.
  • May be contributing to a relative shift in appetite toward traditional safe-haven assets like gold.

7.2 Confidence in the Monetary System

• Inflation now vs. earlier:
  • High inflation is not currently the main concern, unlike the post-2008 period.
• Lingering fear:
  • A section of households may be buying gold as a hedge against perceived risks in the modern monetary and financial system.
  • Analysts caution that this possibility, though uncertain, should not be fully dismissed.

8. Policy Options: Managing India’s Gold Obsession

8.1 Need for New Instruments

• Challenge for policymakers:
  • Households’ preference for gold is deep-rooted and unlikely to vanish.
  • But high gold imports strain the current account and widen the trade deficit.
• Possible way forward:
  • Consider reviving or redesigning SGB-like schemes with more sustainable fiscal costs.
  • Explore similar products for silver and other metals to channel savings into financial claims rather than physical imports.

8.2 Balancing Household Interests and Macroeconomic Stability

• For households:
  • Gold ETFs and bonds offer safer, more convenient exposure to gold prices.
  • Diversification across assets (deposits, equities, gold, bonds) remains important.
• For the economy:
  • Policies must limit excessive capital outflow via precious metal imports.
  • Well-designed financial products can align household preferences with national economic interests.

9. Key Takeaways

• Indian households are steadily moving a part of their savings from bank deposits and equities into gold, particularly through ETFs.
• Gold ETF inflows have reached record levels and now significantly influence India’s gold import bill.
• This trend is contributing to a wider trade deficit and effectively exporting capital out of the country.
• The discontinued Sovereign Gold Bond scheme had successfully reduced gold imports without requiring physical gold purchases by the government.
• In a volatile global environment, policymakers may need to revive or innovate gold- and silver-linked financial products to balance household security with macroeconomic stability.

Source: Indian Express