Ban on Gold Purchases, Increased Gold and Silver Tariffs! How Severe is India's Foreign Exchange Pressure?

With the Strait of Hormuz blocked and oil prices remaining high, India, as the world's third largest crude oil importer, relies on imports for over 85% of its oil consumption, and 46% of its crude oil and 50% of its liquefied natural gas (LNG) imports pass through the Strait of Hormuz. Coupled with the country's relatively small strategic crude oil reserves, India is quickly facing severe foreign exchange liquidity pressure.

The Indian Rupee has fallen from 90.90 at the end of February to a historic low of 95.63, becoming the worst-performing major currency in Asia; foreign exchange reserves have sharply dropped by $37.8 billion in two months to $690.7 billion. Among them, gold reserves alone have decreased by $5.02 billion, and the Reserve Bank of India (RBI) is utilizing various available assets, including gold, to defend the exchange rate.

Although the RBI has recently taken a series of unconventional measures to stabilize the exchange rate—including restricting banks' daily foreign exchange positions (within $100 million), limiting offshore non-deliverable forward (NDF) contract trading, cracking down on arbitrage, and strengthening foreign exchange regulation to curb speculative behavior—the results remain limited.

On May 11, Indian Prime Minister Modi issued a rare and strongly crisis-tinged appeal, urging the public to stop buying gold over the coming year and to completely refrain from purchasing gold jewelry for any occasion, including weddings. Previously, he also advocated for widespread adoption of working from home, using public transportation, and carpooling to save fuel consumption, and strongly suggested postponing unnecessary overseas travel and vacations.

India is attempting to address reserve pressures through administrative and public opinion measures, but the highly fragile nature of its foreign exchange system suggests that such moral persuasion is unlikely to effectively alleviate forex pressure in the short term. On May 13, India announced a substantial increase in import tariffs on gold and silver from 6% to 15%, aiming to curb gold and silver imports and boost the rupee.

Who Is Consuming India's Foreign Exchange Reserves?

The biggest source of pressure on India’s foreign exchange reserves is the continually strengthening chain of “energy—trade deficit—capital outflow—currency depreciation.” Energy supply shocks caused by US-Iran conflicts have rapidly worsened India’s import costs. Against a backdrop of high oil prices, India’s import bills have quickly expanded. Because India has long maintained domestic stability through subsidies and price freezes for fuel, the energy shock is not fully transmitted to consumers but instead results in fiscal pressure and foreign exchange consumption. For every $10 per barrel increase in crude oil prices, India's annual import cost rises by about $14 billion.

Gold imports are also a key focus. India is the world's second-largest gold consumer; gold is deeply embedded in its religious, wedding, and festive culture. Even with soaring gold prices, popular demand remains strong. In fiscal year 2026, India imported 721.0 tons of gold, with an import value of $71.98 billion (a significant year-on-year increase of 24%), making it the second largest source of deficit after oil.