The 16 percent volume decline in India's gold demand during the July-September quarter of 2025, juxtaposed with a surge in its value, offers a fascinating and complex picture of the nation’s economic and cultural relationship with the yellow metal. This dual trend, where high prices lead to lower physical purchases but higher import expenditure, serves as a crucial indicator for policymakers regarding the Current Account Deficit (CAD), household savings, and consumption dynamics.
The Price Elasticity Paradox in Gold Demand
The immediate cause of the 16 percent volume drop is clearly the high price environment. It highlights that the average gold price jumped 23 percent year-on-year. As predicted by basic demand theory, when prices rise sharply, consumers curtail discretionary purchases.
This volume decline is primarily concentrated in jewellery demand, which plummeted by 31 percent. Gold jewellery in India is highly sensitive to price, as it often involves high-value, non-essential spending for weddings and festivals. Consumers adapt by postponing purchases, opting for lighter-weight pieces, or increasing the exchange of old gold for new. This consumer prudence is a short-term dampener on the jewellery industry, impacting employment and revenue for local artisans and retailers.
Conversely, the data reveals a sharp jump in investment demand for bars and coins, surging 20 percent by volume and 74 percent in value. This highlights a fundamental shift in perception. Indian consumers increasingly view gold not just as adornment but as a strategic, long-term store of value and a safe haven against currency depreciation and geopolitical instability. The willingness of investors to adapt to higher price levels suggests an underlying conviction in gold's sustained utility as a financial asset.
Macroeconomic Implications and the Current Account Deficit
For the Indian economy, a drop in physical import volume is usually welcome, as gold is the second-largest non-oil import item. Reduced imports ease pressure on the trade balance. Indeed, gold imports in the quarter dropped by 37 percent year-on-year.
However, the high price tag complicates this benefit. While volume fell, the overall value of imports in foreign currency may not have declined proportionally or, in some quarters, could even rise if the price increase outstrips the volume decline. High gold prices mean that India still pays a significant amount of foreign exchange to acquire the metal, which continues to exert pressure on the Current Account Deficit (CAD) and, by extension, the Indian Rupee's stability.
A lower CAD is vital for India's macro stability. Therefore, the sustained high international price environment, even with demand contraction, ensures that gold remains a structural challenge to India's external finances. The government’s goal must be to channel domestic demand into non-import-dependent forms, such as Sovereign Gold Bonds (SGBs), rather than physical metal.
The Wealth Effect and Future Outlook
The appreciation in gold prices has a dual effect on household economics. Firstly, it creates a positive wealth effect. Indian households collectively hold thousands of tonnes of gold. When its value soars, their paper wealth increases, potentially encouraging overall consumer confidence and spending in other sectors of the economy.
Secondly, the high price is successfully inducing the recycling of existing gold. The snippet notes this trend, where consumers are exchanging old jewellery. This move towards domestic recycling is a positive step, as it offsets the need for new imports and converts idle household savings into monetized assets, benefiting the domestic gold market without taxing foreign exchange reserves.
Looking ahead, the World Gold Council anticipates a robust demand driven by the impending wedding and festive seasons. This suggests the demand contraction is temporary. If the high price trend sustains, the Indian economy will continue to face the tightrope walk of balancing consumer cultural preference for gold with the macroeconomic necessity of controlling the import bill. Prudent economic management dictates policies that facilitate the financialization of gold while capitalizing on high prices to encourage recycling, thereby minimizing the drain on foreign exchange reserves. This strategic commitment to gold as a long-term store of value should be met with effective government mechanisms to mobilize this asset domestically.
