According to SBI Research, wider price gaps between international and domestic gold markets have historically encouraged smuggling and grey market activity in India.
India’s decision to raise customs duty on gold imports to 15% has triggered concerns that higher domestic bullion prices could fuel illegal gold trade, smuggling and grey market activity across the country.
According to a recent SBI Research report, elevated import duties combined with record-high gold prices may widen the gap between international and domestic bullion prices, creating arbitrage opportunities that make unofficial gold trade financially attractive.
The warning comes at a time when India’s gold import bill has surged sharply despite declining import volumes, highlighting the impact of soaring global gold prices on the country’s external account.
Gold import bill
SBI Research said India’s gold import value increased from $57.9 billion in FY25 to $72.4 billion in FY26. However, import volumes have been falling for the last two years, declining by nearly 5% in both FY25 and FY26.
The report said this indicates that higher gold prices — and not rising domestic demand — are the primary reason behind the growing import bill.
“This shows that overall import bill has been dominated by price effect while volume effect is negative for last two years,” SBI Research noted.
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India remains one of the world’s largest consumers of gold, and fluctuations in bullion prices have a direct impact on the country’s trade deficit and Current Account Deficit (CAD).
The report added that while gold imports continue to influence India’s external balance, the relationship between gold imports and CAD has varied over time.
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Gold import duty
The Centre recently raised customs duty on gold imports to 15%, reversing the sharp duty reduction announced in June 2024, when import taxes were cut to nearly 6%.
The government’s move is aimed at discouraging excessive imports of precious metals and reducing pressure on India’s import bill at a time of geopolitical uncertainty, elevated commodity prices and rupee weakness.
Higher customs duty increases the landed cost of imported gold, which in turn raises domestic bullion prices.
However, SBI Research warned that import duty hikes have historically produced unintended consequences in the form of smuggling and unofficial supply channels.
Smuggling risks
“The decision to increase duty on gold imports has been taken on numerous occasions in the past. However, imposition of duty has its consequences in diverting the physical supply to grey channels,” the report said.
The report explained that higher import taxes widen the spread between offshore and domestic gold prices, creating arbitrage opportunities for illegal traders.
“This is driven by higher spread between the offshore and onshore price of gold, which creates opportunity for arbitrage,” SBI Research added.
Market experts say that when official imports become expensive because of customs duties, smuggled gold often becomes comparatively cheaper in the domestic market, encouraging illegal trade routes.
India has historically witnessed a rise in gold smuggling whenever import duties were sharply increased, especially through informal cross-border channels.
DRI seizures
SBI Research also observed that previous gold duty hikes were followed by increased seizures by the Directorate of Revenue Intelligence (DRI), indicating a correlation between higher duties and illegal bullion movement.
“Invariably, rise in duty results in higher seizure by DRI,” the report stated.
The report expects some moderation in official gold imports in the coming months due to elevated duties. However, analysts believe strong investor demand for gold as a safe-haven asset may continue to support domestic demand despite rising prices.
SBI Research also pointed out that nearly 38% of imported gold is re-exported in the form of jewellery, indicating that not all imports are consumed within the country.
Published on: May 13, 2026 8:24 PM IST
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