Why India needs to reevaluate its reliance on gold investments

For a long time, commercial banks in India lent money against the pledge of gold jewellery. Bankers used to consider the loan portfolio as a safe one from the point of view of recovery, as jewels can be auctioned if the loan is not repaid.

Over the years, the RBI allowed various Non-Banking Finance Companies (NBFCs) also to lend money against gold jewels. There is a tremendous growth in gold loans by banks and NBFCs.

Rising numbers

As of February 2025, banks had outstanding gold jewellery loans worth Rs 1.91 lakh crore, up from Rs.1.02 lakh crore in February 2024, an astounding 87.4 per cent year-on-year growth. NBFCs like Muthoot, Manappuram and IIFL were estimated to hold around Rs 2 lakh crore in gold loans by early financial year 2025.

With the recent relaxation of the margin on jewellery loans and also due to the increase in the market value of gold, this portfolio is likely to go up in the coming months.

Also read | TN leaders slam RBI's new gold loan norms, say it hits financial lifeline

When gold jewels are readily accepted as security for raising a loan, the liquidity improves and the owners of gold jewels are encouraged to continue with their holdings. This also induces more and more people to buy gold jewels.

We have to examine whether this investment (better to call it deploying funds to buy gold) is in national interest.

RBI's gold accumulation spree

During the financial year 2024-25, the RBI added 57.49 tonnes of gold. Total gold accumulation from FY 2020 to FY 2025 was roughly 187 tonnes.

As of March 31, 2025, the total gold holdings with RBI were 879.59 tonnes, up from 822.10 tonnes as of March 31, 2024.

The rupee value comes to Rs 4.31 lakh crore, which is an increase of 57 per cent from the previous period.

The RBI’s gold accumulation reflects a deliberate diversification strategy. The recent surge in FY 2025 was the largest increase in seven years, signaling a stronger tilt towards gold as a reserve buffer. The central bank may justify its gold accumulation stating that it helps hedge against global uncertainties, currency fluctuations, and US dollar volatility.

No yield or income generation

• Gold does not produce interest, dividends, or rental income.

• Unlike productive assets (e.g., stocks, real estate), gold simply sits in storage and does not grow in quantity or provide periodic returns.

Does not contribute to economic growth

• Gold does not facilitate production, employment, or innovation.

• It is not involved in manufacturing, services, or other sectors that drive GDP.

Buying gold is idle capital

• Money invested in gold remains locked in a static asset.

• That capital could have been invested in businesses, infrastructure, or other ventures that create economic value.

Needs storage and involves security costs

• Gold requires secure storage and may incur insurance costs.

• These additional costs further reduce any potential gains.

Also read | RBI's new gold loan guidelines leave farmers, MSMEs deeply worried

Price volatility without underlying productivity

• Gold prices can be highly volatile and are driven largely by sentiment, inflation fears, or geopolitical risks, rather than intrinsic productivity.

• It lacks the growth drivers that other assets (like companies or properties) have.

Limited use in modern economies

• Industrial use of gold is limited compared to its role as a store of value.

• It plays a minor role in actual production compared to resources like steel, copper, or oil.

Does not multiply or scale

• A factory or business can scale operations and increase output over time.

• Gold does not have any such compounding or expansion effect.

Hoarding hampers liquidity

• Traditionally gold is retained/hoarded and passed down through generations. In a true economic sense, the holder does not get any benefit except the mental satisfaction of holding something of good value.

• This practice locks wealth in an unproductive form and reduces its circulation in the financial system.

What is expected from RBI?

The RBI must set an example by curtailing its holding on gold reserves. This will reduce the pressure on gold prices within the country, apart from curbing gold smuggling into the country. This will also put the wealth in the real productive class which will help GDP growth.

The RBI must also discourage loans against jewellery by increasing margin and interest rates. This will reduce jewel loan NPAs (non-performing assets).

It is not correct to say that reducing the margin for small borrowers helps poor people. In fact, it encourages poor people to continue to hold gold, an unproductive asset, and reduces their wealth accumulation capability.

Also read | TN CM urges FM Sitharaman to reconsider RBI’s gold loan restrictions

Here’s a key statement by Morarji Desai when he introduced the Gold Control measures (beginning with the 1963 Order and later the 1968 Act) in a nationwide broadcast: “Ours is a large country and numerous opportunities are either available or can be created … 99% of the population had no use for gold and those who did could manage with 14 carats. This, really, is no sacrifice but only a service to the country.”

It makes true economic sense to discourage investment in gold for the entire country.

(The views expressed here are the author's, and do not constitute investment advice.)