Financializing India’s Gold: An Empirical Audit Of GMS And SGB Frameworks – IMPRI Impact And Policy Research Institute

Policy Update
Ritobrata Purkayastha

Background

India’s macroeconomic relationship with gold represents a complex intersection of socio-cultural security, retail asset preservation, and structural trade vulnerability. Privately held gold across Indian households and religious institutions is estimated to be between 25,000 and 28,000 tonnes.

This massive volume, valued at over $1.5 trillion, constitutes one of the largest concentrations of idle private wealth globally, exceeding the aggregate sovereign gold reserves of the top ten international central banks combined. While this gold pool provides financial security to individual families—functioning as immediate emergency collateral in a domestic gold loan market valued at Rs 7.1 lakh crore—its massive scale imposes severe structural strain on the broader Indian economy.

Because India has a minimal volume of domestic gold production, it remains structurally dependent on substantial gold imports to fulfill domestic demand, which historically averages between 700 and 1,000 tonnes annually. Gold imports account for an average of 10% of total domestic imports, serving as a primary driver of the trade deficit and current account volatility. For example, the net import bill of gold stood at $46 billion in the 2024-25 fiscal year and peaked at a record $71.98 billion in the 2025-26 fiscal year. This continuous outflow of foreign exchange reserves to purchase a non-productive, idle asset exerts downward pressure on the Indian Rupee, exposing the nation to imported inflation and balance-of-payments vulnerability.

Historically, the government attempted to curb this demand using regulatory and fiscal measures, including the Gold Control Act of 1962, the 80:20 import rule, and multiple upward tariff adjustments. However, because domestic demand remains highly inelastic due to gold’s role as “Stree-Dhan” (independent female financial security) and a traditional hedge against inflation, restrictive policies often led to unintended consequences, such as a rise in gold smuggling.

Recognizing that suppressing demand was ineffective, the Government of India launched the “Swarna Bharat” initiative on November 5, 2015, introducing the Gold Monetisation Scheme (GMS) and the Sovereign Gold Bond (SGB) framework. The strategic objectives of these dual frameworks were to mobilize idle physical gold from household safes and temple vaults into commercial circulation, provide the domestic jewelry industry with locally sourced gold loans, and offer a retail paper gold alternative that would redirect physical investment demand toward formal financial assets.

Functioning

The GMS and SGB frameworks established parallel channels to financialize domestic gold holdings, utilizing distinct institutional mechanisms.

The Gold Monetisation Scheme was designed as a direct replacement for the older Gold Deposit Scheme (1999) and the Gold Metal Loan Scheme. It permits resident individuals, Hindu Undivided Families (HUFs), commercial entities, and charitable trusts to deposit physical gold—including raw bars, coins, and non-studded jewelry—into interest-bearing bank accounts.

To improve accessibility compared to older programs, the GMS lowered the minimum threshold to 10 grams of physical gold, with no maximum limit. To deposit gold, investors submit physical gold to Bureau of Indian Standards (BIS) certified Collection and Purity Testing Centres (CPTCs) or GMS Mobilisation, Collection & Testing Agents (GMCTAs). The gold is melted and fire-assayed to determine its exact fine gold equivalent at 995 fineness, which is then credited to a Gold Savings Account.

Following a comprehensive performance review, the Ministry of Finance and the Reserve Bank of India discontinued the Medium-Term (5 to 7 years) and Long-Term (12 to 15 years) Government Deposit (MLTGD) components of the GMS effective March 26, 2025, halting all fresh deposits and renewals. Consequently, the GMS operates solely through the Short-Term Bank Deposit (STBD) framework, spanning 1 to 3 years, at the commercial discretion of scheduled commercial banks.

Individual banks set interest rates and terms, subject to a general 1-year lock-in period. For example, the State Bank of India’s Revamped Gold Deposit Scheme (R-GDS) offers a minimum deposit of 30 grams of 995 fineness gold, yielding 0.50% for 1 year, 0.55% for over 1 up to 2 years, and 0.60% per annum for more than 2 up to 3 years.

The Sovereign Gold Bond scheme operates as a direct sovereign debt instrument denominated in grams of gold and issued by the RBI on behalf of the Central Government. Denominated in multiples of 1 gram of gold, individual and HUF investors are limited to a maximum subscription of 4 kilograms per financial year, and trusts are capped at 20 kilograms. SGBs carry a standard 8-year tenure, with an early exit option after the fifth year on interest payment dates.

They yield a fixed, simple interest rate of 2.50% per annum on the nominal investment, paid semi-annually. Importantly, the government suspended all fresh primary SGB issuances after February 2024 due to high borrowing cost concerns, leaving no issuance calendar for the 2024-25 and 2025-26 fiscal years. Fresh SGB investment is now restricted to secondary transactions on stock exchanges.

Performance

The empirical track record of GMS and SGB reveals a stark divergence in operational success, reflecting deep consumer psychology barriers and significant fiscal exposure.

GMS Mobilization and Trajectory

The GMS has struggled to achieve its intended scale since 2015. By March 2025, the scheme had mobilized a cumulative total of approximately 38 tonnes of gold. Compared to an estimated private gold reserve of 25,000 tonnes, this represents a mobilization rate of approximately 0.15%, indicating that a vast majority of domestic gold remains locked in private safes. This slow progress reflects a steep consumer adoption curve. Initial phases (2015–2021) mobilized only 21 tonnes due to low awareness and a strong aversion to melting ornaments. By November 2024, the total reached 31.16 tonnes before crawling to 38 tonnes by March 2025.

SGB Issuance, Returns, and Fiscal Deficit Implications

In contrast to the GMS, the SGB scheme achieved significant retail popularity, raising Rs 72,274 crore and issuing bonds equivalent to 147 tonnes of gold over nine financial years. However, because SGB redemptions are tied to prevailing gold prices, the rapid appreciation of global gold has transformed the program into a substantial unhedged liability for the state. Gold prices rose from approximately Rs 26,300 per 10 grams in 2015 to over Rs 1,00,000 in 2025, and further toward Rs 1,50,000 per 10 grams in H1 2026. Of the 147 tonnes issued, approximately 21.31 tonnes have been redeemed, leaving an outstanding balance of 125.65 tonnes.

The outstanding fiscal liability is calculated by multiplying the outstanding gold volume in grams by the prevailing market price of gold per gram. For the outstanding 125.65 tonnes (equivalent to 125,650,000 grams) and a mid-2026 redemption price of Rs 12,567 per gram, the total outstanding liability reaches Rs 1,57,911 crore. The government’s net fiscal deficit on these outstanding bonds represents the gap between this current outstanding liability and the nominal capital originally collected.

Subtracting the original collections of Rs 65,995 crore from the current redemption liability of Rs 1,57,911 crore leaves a net fiscal deficit of Rs 91,916 crore that must be funded directly from the government’s budget. This deficit is further increased by the annual interest cost of 2.50% on the outstanding bonds, which adds approximately Rs 1,650 crore per annum to the exchequer’s expenditure. Factoring in coupon payments, the total cash outflow for early tranches was 148% higher than the capital originally raised, presenting a significant fiscal challenge.

Sovereign Reserves and Revaluation Risk

To mitigate these liabilities, the RBI built a strategic physical reserve, acquiring 321 tonnes of gold since the inception of the SGB scheme in 2015. This physical accumulation generated approximately $20 billion in paper mark-to-market gains, which are transferred annually to the government, helping to offset SGB redemption costs. While speculations in mid-2026 suggested the RBI sold $12 billion of gold to defend the rupee, official data clarified that central bank gold reserves actually increased, with physical reserves remaining unchanged at 880.52 tonnes. A book-valuation adjustment of 4.1% (reduction of Rs 46,156 crore) in the week ending May 22, 2026, was driven by global price shifts, not physical sales.

Impact

The financialization of gold has significantly altered India’s external trade policies, domestic bullion pricing, and the retail financial ecosystem.

Macroeconomic and Trade Realignments

Despite GMS and SGB interventions, the core domestic demand for gold has remained highly inelastic. To manage imports and protect the current account, the government hiked the basic import duty on gold from 6% to 15% on May 13, 2026. The compounded effective tax burden, incorporating the 15% import duty (including cess) and the 3% GST, stands at 18.45%. This tariff adjustment drove domestic 24-karat gold prices to historical highs of Rs 15,475 per gram in June 2026. While the tax hike suppressed immediate legal physical jewelry demand by an estimated 70%, it triggered a massive surge in alternative digital precious metal formats.

Formalization and the Rise of Digital Alternatives

The intersection of high physical import duties and the suspension of fresh SGB issues has accelerated the shift toward private digital gold and gold leasing instruments. Purchases of digital gold via unified payment interfaces (UPI) grew fourfold year-over-year in the first quarter of 2026. Private fintech platforms have capitalized on this momentum by offering gold leasing products (such as SafeGold and myGold) that allow retail investors to lease their gold holdings to verified jewellers, yielding a recurring return of 2% to 7% per annum paid in gold weight.

This mechanism directly feeds the domestic jewelry market through Gold Metal Loans (GML), enabling organized jewelry giants to access low-cost financing and expand store footprints. Consequently, organized players grew their share of the Indian jewelry market from 30% in FY18 to 40% in FY24, with projections to reach 45% by FY30.

Emerging Issues

The transition of paper gold instruments from tax-advantaged sovereign assets to mainstream, fully taxable financial products has introduced significant structural friction, reducing their appeal relative to emerging private digital alternatives.

Cultural Barriers and Design-Loss Friction in GMS

The GMS has struggled to gain traction due to a deep cultural disconnect. In India, gold jewelry is often held as heirloom wealth and carries significant emotional value. The requirement that jewelry must be melted at CPTCs to verify purity acts as a major psychological barrier for households. Investors are unwilling to destroy design value and accept making charge losses—which range from 10% to 25%—in exchange for a modest yield on a temporary bank deposit.

Fiscal Sustainability and the Death of SGB

The SGB scheme proved highly successful at mobilizing retail capital, but became fiscally unsustainable for the exchequer. Under the SGB framework, the government carries the entire downside of gold price appreciation. Because the government does not actively deploy SGB proceeds into gold-yielding assets, it has been forced to fund both the annual interest payments and the massive redemption capital appreciation from tax revenues. This structural issue ultimately led to the suspension of fresh SGB tranches.

The Budget 2026 SGB Tax Overhaul

The Union Budget 2026 introduced pivotal amendments to SGB taxation, effective April 1, 2026, aimed at simplifying capital gains taxes and eliminating secondary market arbitrage. Under the original framework, any SGB redemption with the RBI was completely exempt from capital gains tax, whether the bond was acquired via primary issuance or on stock exchanges.

Budget 2026 fundamentally restructured these exemptions, dividing SGB investors into two distinct classes. Individual investors who purchase bonds directly from the RBI during primary issuance and hold them continuously for the entire 8-year tenure until maturity remain completely exempt from capital gains tax. However, secondary market buyers who purchase SGBs on stock exchanges (NSE/BSE) will now face a flat 12.5% long-term capital gains tax on maturity or redemption if held over 12 months, or short-term capital gains tax at their marginal slab rate if held under 12 months. Furthermore, any premature redemption (even after the 5th year) is now subject to capital gains tax. This legislative change has drastically reduced post-tax returns for secondary market buyers, closing a major tax-arbitrage loophole where traders purchased discounted secondary SGBs purely to harvest tax-free redemption gains.

Way Forward

Addressing the structural limitations of India’s gold financialization programs requires a shift from restrictive fiscal measures to targeted, market-oriented reforms.

Refocusing GMS on Non-Destructive Assets

To improve GMS adoption, the scheme should redirect its focus from sentimental jewelry toward standardized retail gold bars and coins, which do not require melting. Because these formats are held primarily for investment and lack emotional attachments, owners are more receptive to interest-bearing paper alternatives. Additionally, expanding the network of GMS Mobilisation, Collection & Testing Agents (GMCTAs) to include authorized local jewelry showrooms would allow investors to open Gold Deposit Accounts at their point of purchase, reducing transactional friction.

Structurally Hedging Sovereign Gold Liabilities

If the government resumes SGB issuances to meet retail investment demand, it must implement an active hedging strategy to manage its price risk. Deploying a portion of SGB proceeds to purchase physical gold reserves or leasing gold directly to domestic jewellers would generate recurring physical yields, aligning the exchequer’s assets with its outstanding liabilities at maturity.

Expanding Regulated Financial Alternatives

To reduce the reliance on physical imports, the government should expand access to alternative gold-backed financial instruments. Standardizing Electronic Gold Receipts (EGRs) on commodity exchanges would provide transparent pricing, lower transaction costs, and immediate liquidity. In parallel, strengthening rural safety nets—including crop insurance and health coverage—would reduce the structural need for rural households to hold physical gold as an emergency financial cushion, gradually channeling idle private wealth into productive sectors of the formal economy.

Selected References and Important Links

1. India Gold Policy Centre & PRICE. (2021). PRICE Household Gold Consumption Survey 2020-2021. Indian Institute of Management Ahmedabad. (https://www.iima.ac.in/sites/default/files/2023-06/IIMA%20IGPC%202023%20Annual%20Report.pdf)
2. Insights on India. (2026). UPSC Editorial Analysis: India’s Gold Dependency. https://www.insightsonindia.com/2026/06/13/upsc-editorial-analysis-indias-gold-dependency/
3. Ministry of Finance. (2015). Gold Monetisation Scheme (GMS) 2015. Government of India. http://dea.gov.in/schemes-services/gold-monetisation-scheme-2015
4. Narayanan, S., Gopalakrishnan, B., & Sahay, A. (2020). Nuances of gold consumption: Emotional vs. rational drivers. India Gold Policy Centre, Indian Institute of Management Ahmedabad. https://www.iima.ac.in/sites/default/files/2023-06/Priya.pdf
5. National Institute of Securities Markets (NISM). (2026). How Budget 2026 Changes Sovereign Gold Bond (SGB) Taxation. https://www.nism.ac.in/blog/how-budget-2026-changes-sovereign-gold-bond-sgb-taxation/
6. PIB Delhi. (2025). Medium Term and Long Term Government Deposit (MLTGD) components of Gold Monetisation Scheme (GMS) discontinued. Press Information Bureau, Ministry of Finance.(https://www.pib.gov.in/PressReleseDetailm.aspx?PRID=2115009)
7. Team Angel One. (2025). Sovereign Gold Bonds: How Rising Gold Prices Have Grown Government Liabilities to Rs 1.2 Lakh Crore. https://www.angelone.in/news/economy/sovereign-gold-bonds-how-rising-gold-prices-have-grown-government-liabilities-1-2-lakh-crore

About the Contributor

Ritobrata Purkayastha is a Research & Editorial Intern at the IMPRI Impact and Policy Research Institute, New Delhi. He is currently pursuing a Bachelor of Science (B.Sc.) in Economics (3rd Year) at XIM University, Bhubaneswar. His research interests encompass monetary econometrics, public policy, and the application of data science and quantitative econometric tools to socio-economic challenges.

Acknowledgements

The author sincerely expresses gratitude to the reviewers Kavin Adithya and Ameya Satnam  for their valuable comments, constructive suggestions, and continuous guidance throughout the preparation of this article. Their insightful feedback significantly enhanced the clarity, organisation, and analytical quality of the manuscript. The author also acknowledges the support and encouragement received during the research and writing process, which contributed to the successful completion of this work.

Disclaimer

All views expressed in the article belong solely to the author and not necessarily to the organisation.

Read more at IMPRI:

Capital Deepening vs. Total Factor Productivity under the India Semiconductor Mission 2.0

Dadra and Nagar Haveli and Daman and Diu: Department-Wise Schemes Update 2026