India's gold imports fall sharply: Kotak sees 'good, bad and ugly' outcomes

old imports plunge after duty hike: Kotak sees three possible explanations

Lower household demand could help India’s external balances, but a shift to unofficial channels could hurt tax revenues, says Kotak Institutional Equities

India’s sharp fall in reported gold imports since May 2026 may not be as straightforward as it appears. While lower gold purchases could ease pressure on the country’s current account and balance of payments, Kotak Institutional Equities sees two less benign possibilities — households may simply be postponing purchases, or some gold trade could be shifting to unofficial channels.

In a September 23 strategy report titled Sharp decline in reported gold imports—good, bad or ugly?, Kotak said the decline in official imports since May 2026 could reflect three factors: a structural reduction in household demand following the increase in import duties, a temporary pause in purchases as consumers wait for possible duty cuts, or greater use of unofficial import channels.

Gold imports fall sharply

Official monthly gold imports have declined sharply since May despite broadly stable domestic gold prices since February, Kotak said. The decline is positive for India’s current account deficit (CAD) and balance of payments because gold is a major import item. However, the brokerage cautioned that lower reported imports could have “hidden” negatives if actual purchases have merely moved outside official channels.

Gold imports during the first five months of FY27 stood at $17.5 billion, compared with $16.9 billion during the corresponding period of FY26. Kotak has assumed gold imports of $88 billion for FY27, although it flagged downside risks to this estimate based on the latest trend. It expects demand to pick up during the forthcoming festive season.

Duty hike changes the equation

A key trigger was the increase in gold import duties effective May 13, 2026. The total import duty rose to 15% from 6%, with basic customs duty increasing from 5% to 10% and the agriculture infrastructure and development cess rising from 1% to 5%.

Including GST, Kotak estimates that the effective duty and GST incidence on the landed value of imported gold increased to 18.5% from 9.2%.

Kotak estimates the higher duty resulted in domestic gold prices rising by around 9% relative to global prices. At the same time, stable gold prices may have reduced the investment appeal of physical gold for households.

Three scenarios for investors to watch

The good scenario: If households have permanently reduced their appetite for physical gold, lower imports would improve India’s external balances. Kotak also points to gold ETF flows as an indicator of household behaviour, noting that inflows increased sharply when gold prices were rising in the second half of 2025 but declined as prices weakened after February 2026.

“The sharp decline in monthly gold imports from May 2026 may reflect higher import duties on gold from May 13, 2026, which resulted in a 9% increase in domestic gold prices relative to global gold prices and/or stable global and domestic gold prices, which may have reduced the investment appeal of gold for households; we note the sharp increase in inflows into gold ETFs on rising gold prices in 2HCY25 and the sharp drop in inflows into gold ETFs on declining gold prices since February 2026, as a good indicator of household behavior linked to trailing returns of an asset class,” said Kotak.

The bad scenario: Consumers could simply be delaying purchases because they fear the government may reduce import duties. A subsequent duty cut could trigger a sharp recovery in gold imports, particularly as households resume purchases postponed after the May duty increase. Kotak said similar pauses and subsequent jumps have occurred after previous changes in import duty rates.

“The sharp decline in monthly gold imports from May 2026 may simply reflect a temporary slowdown in gold purchases by Indian households, as they (1) digest the one-time increase in domestic gold prices from higher import duties and (2) fear cut in import gold duties that may result in a loss on recently-purchased gold. Gold imports may recover to ‘normal’ levels if the government was to cut import duties. We have seen similar lulls and jumps following import duty rate changes in the past,” Kotak said in its report.

The ugly scenario: Gold demand may not have fallen as much as official data suggests. Instead, imports could be shifting towards unofficial channels, with households buying more from the unorganised sector. That would reduce the government’s customs and GST collections while leaving the underlying demand for gold largely intact.

“In addition, the government may be losing significant revenues through lower customs and GST revenues on gold if a large amount of gold ‘imports’ and ‘purchases’ were bypassing official channels. We have long argued for higher GST rates and lower import duties on gold as an alternative route to reduce gold imports, increase household gold recycling and protect government revenues,” noted the report.

What it means for India’s external position

Kotak estimates India’s CAD at 1.2% of GDP in FY27, assuming an average crude oil price of $85 a barrel. But the brokerage cautioned that its gold import assumption is itself a risk to this forecast. Its FY27 estimates assume gold imports of $88 billion, compared with $72 billion in FY26.

Kotak has also proposed a different taxation structure for gold — higher GST combined with lower import duties — arguing that this could discourage imports while encouraging recycling and protecting government revenues. Its hypothetical scenarios suggest that an 8% GST rate could increase combined central and state revenues despite a lower basic customs duty.