India raised import tariffs on gold and silver to 15% from 6% to reduce US dollar demand and support the rupee. The policy aims to narrow the trade deficit linked to strong bullion imports.
In Q1 2026, gold and silver imports, which make up 14% of total imports, rose 146% year on year. Over the same period, global gold and silver prices increased 60% and 161% year on year, respectively.
Rupee Pressure And Trade Deficit
The rise in bullion imports has added to onshore demand for US dollars and contributed to a wider trade deficit. The rupee has stayed under pressure while USD/INR remains near record levels.
Prime Minister Narendra Modi called on citizens to curb gold buying, reduce fuel use, and limit air travel to protect foreign exchange reserves. India’s FX reserves fell 1.1% to USD690.7bn in the week ending 1 May.
USD/INR rose 0.1% to 95.72 and recorded a fourth straight daily gain. Foreign investors have net sold USD1.6bn of equities so far this week.
With the government raising tariffs on gold and silver to 15%, we should prepare for increased volatility in the USD/INR currency pair. The pair is already near its all-time high of 95.72, and this move signals that authorities are becoming more aggressive in their defense of the rupee. Derivative traders should consider buying options to profit from sharp price swings, as India’s VIX index has already climbed to 18.5, its highest level this year.
Market And Policy Implications
This tariff hike is likely just the opening move in a wider, coordinated effort to support the currency, especially with foreign exchange reserves dipping to USD690.7bn. Prime Minister Modi’s public call for reduced spending reinforces the government’s serious intent to curb dollar outflows. We are now looking towards the Reserve Bank of India’s next policy meeting, where overnight swaps are pricing in a 65% chance of an interest rate hike to further defend the INR.
The pressure on Indian equities is also likely to intensify, given that foreign investors have already pulled USD1.6bn this week alone. A strong dollar and the prospect of higher domestic interest rates create a difficult environment for stocks. For traders, this situation may present an opportunity to purchase put options on the Nifty 50 index as a hedge against further market declines.
We saw a similar, though more severe, situation unfold during the 2013 taper tantrum when the rupee fell sharply against the dollar. At that time, the RBI responded with aggressive rate hikes and measures to curb gold imports to stabilize the currency. The current actions suggest policymakers are drawing from that same playbook to prevent a disorderly depreciation.
