Several Indian Funds Suspend Large-Scale Gold ETF Subscriptions: Regulators Act Early to Prevent Surge in Imports Ahead of Festival Season

According to Reuters, several major Indian fund companies have suspended large-scale subscriptions to gold ETF ahead of the traditional peak season for gold consumption.

Institutions including Kotak Mahindra Mutual Fund, UTI Mutual Fund, and HDFC Mutual Fund issued announcements on Thursday evening, implementing restrictions on bulk subscriptions to gold ETF, but redemptions of existing fund shares remain unaffected.

Reuters, citing a senior fund executive familiar with the discussions and two people from the gold industry, said the adjustment was made after communication between the Securities and Exchange Board of India (SEBI) and the industry. Public announcements from several fund companies did not specify the reasons, and SEBI had not responded to a request for comment as of the time of reporting.

Industry insiders believe that the policy is more likely a precautionary measure designed to avoid a sudden surge in gold imports driven by festival demand in October and November. With international oil prices remaining high and the Indian rupee under pressure, regulators are paying closer attention to the impact of gold demand on the import bill and the foreign exchange market.

With festival season approaching, ETF capital could turn into physical import demand

India will celebrate Dussehra in October and Diwali at the beginning of November. Gold holds significant importance in Indian weddings and religious festivities, making this period one of the most concentrated times for physical gold demand throughout the year.

During the same period last year, Indian gold and silver ETFs saw significant inflows. When the stock market underperforms, some investors turn to precious metal products, causing funds’ demand for physical gold and related assets to rise in parallel.

After a gold ETF experiences a substantial increase in subscriptions, fund managers typically need to increase corresponding gold assets to maintain the tracking relationship with gold prices. Given limited domestic gold supply in India and a heavy reliance on overseas consumption, large inflows of ETF funds could eventually boost import demand.

India is the world’s second-largest gold consumer and one of the largest silver consumers. Excessive precious metal demand not only raises the import bill but may also increase the need for US dollars, putting extra pressure on the rupee.

This year, the rupee has been affected by rising international oil prices and continued sell-offs of Indian equities by foreign investors. After rising energy import costs, the government has become more sensitive to increased foreign exchange demand caused by imports of non-essential goods like gold. Earlier this year, it also raised the import duties on gold and silver.

Gold imports have actually been falling recently

The market’s interest in the recent suspension of large-scale subscriptions also stems from the fact that Indian gold imports have not become excessive lately.

Data shows India’s gold imports in September were USD 1.8 billion, down from USD 2.3 billion in August. Over the past two months, both gold and silver imports have declined significantly year-over-year and have not recently contributed to a widening trade deficit.

Therefore, a trader at an Indian private bank supplying gold to ETFs said, this measure “looks more like a precautionary action to prevent a sudden increase in imports in October.”

In other words, regulators are currently guarding against a new round of demand shocks that might occur during the festive season, rather than responding to a surge in gold imports that has already happened.

Previously, India also canceled the 3% Integrated Goods and Services Tax (IGST) exemption previously offered to banks and government-approved institutions when importing gold, silver, and platinum. After the expiration of these benefits at the end of March, the main official gold import channels now require more working capital.

Raising import costs and restricting large-scale ETF inflows together indicate that, in an environment where oil prices push up the import bill and the rupee is under pressure, India is managing potential foreign exchange pressure from gold demand more cautiously.

Suspension affects only large-scale subscriptions; redemptions proceed as normal

The current measure is not a closure of gold ETFs, nor does it limit investors’ ability to exit related products. Reuters confirmed that fund companies have not set restrictions on redemptions, and the adjustments mainly target new large-scale subscriptions.

Funds have not yet disclosed how long the restrictions will remain, nor clarified the conditions necessary for resuming normal subscriptions. The duration of the policy may depend on capital inflows during the festive season, physical gold imports, and the performance of the rupee.

For the Indian gold market, the key change in the coming weeks will be whether traditional festive demand pushes up imports again. If gold ETFs see large-scale inflows similar to last year’s peak season, the current restrictions on bulk subscriptions will reduce the need for funds to rapidly expand gold assets in a short period of time.