New Delhi: Several major Indian mutual funds suspended bulk subscriptions to gold exchange-traded funds just ahead of the festive season, raising questions about whether the coordinated step was designed to curb a potential spike in gold imports during a period of currency pressure.
Fund houses such as Kotak Mahindra Mutual Fund, UTI Mutual Fund, and HDFC Mutual Fund released notices late Thursday evening announcing the halt. While the official notices did not specify reasons for the sudden restriction, a mutual fund executive revealed to Reuters that the action followed an informal nudge from the Securities and Exchange Board of India. Additionally, two bullion industry officials confirmed that the temporary freeze came after discussions with the regulatory body.
A bullion dealer suggested the move could be a precautionary step to head off a surge in October imports. Although neither the government, Sebi, nor the participating fund houses have officially confirmed this interpretation, the timing coincides with Dussehra and Diwali, when household gold purchases traditionally peak. This also aligns with a period when the nation is actively managing its external trade balance and foreign exchange outflows.
Because India imports the vast majority of its gold consumption, overseas purchases must be settled in foreign currencies, predominantly US dollars. A substantial rise in gold imports increases the demand for foreign exchange, which can strain the rupee, particularly when compounded by other major import expenses like crude oil. Higher energy prices alongside elevated bullion demand intensify external account pressures, while a weaker domestic currency can drive up local costs for imported commodities and stoke inflation.
Gold holds profound cultural and financial significance in India, serving as a vital component of weddings, festivals, and household savings. Investors frequently lean toward gold and silver ETFs as safe-haven assets when equity markets experience volatility. Consequently, a sharp demand increase during October could have triggered heavier physical gold imports, even though recent official figures indicate that September gold imports fell to 1.8 billion dollars from 2.3 billion dollars in August, down sharply compared to the previous year.
Although gold ETFs are traded digitally rather than worn as jewelry, they remain directly tied to the physical bullion market. These funds are backed by physical gold held in custody, meaning that substantial inflows and the creation of new units can compel fund managers to acquire more physical metal to maintain adequate backing. Restrictions on large-scale subscriptions could therefore help moderate incremental demand for imported physical gold, though retail purchases and fund redemptions remain fully operational.
The regulatory developments arrived shortly after the release of India's September trade statistics, which reported merchandise exports at 44.4 billion dollars and imports at 74.61 billion dollars, yielding a trade deficit of 30.21 billion dollars. While the monthly data did not reflect an ongoing surge in gold buying, authorities remain attentive to seasonal spikes that could widen the trade deficit and compound pressures on the national currency.