Asset managers have suspended fresh investments in selected gold fund-of-funds ahead of Diwali, as surging gold ETF inflows raise concerns about import demand, dollar outflows and pressure on the rupee.
India’s mutual fund houses have tightened curbs on gold investment for a second time this year, suspending fresh money into selected gold fund-of-funds as the country faces a weaker rupee, firmer oil prices and renewed pressure on its external accounts, according to notices from asset managers and reporting by Business Standard and Mint.
The latest restrictions took effect on 15 and 16 October and apply to fresh lump-sum purchases, switch-ins and new registrations for systematic investment plans and systematic transfer plans in the affected schemes. Existing SIP instalments can generally continue, and investors can still redeem units or switch out, while direct trading in gold exchange-traded funds on stock exchanges remains open, the reports said. That makes the move narrower than a blanket ban on gold investing, but more aggressive than the limits imposed earlier in the year.
Mint reported that the Securities and Exchange Board of India asked mutual funds to stop taking fresh money into gold FoFs from 16 October, although no public circular had been issued by Friday. Business Standard said the step was intended to help address concern over the current account deficit and the rupee’s slide. The timing is notable: the curbs come just ahead of Diwali and during India’s wedding season, when demand for gold usually picks up.
The action follows earlier measures in June, when several fund houses limited large gold ETF creation requests and capped some FoF inflows, only to ease those restrictions in August as pressure on the currency moderated, according to the lead report. Those steps came after the government raised the effective import duty on gold and silver to 15% from 6% in May, a move that included a 10% basic customs duty and a 5% Agriculture Infrastructure and Development Cess.
The latest curbs matter because gold FoFs channel investor money into underlying gold ETFs, which in turn hold bullion or instruments designed to track domestic gold prices. Association of Mutual Funds in India data showed Indian gold ETFs drew ₹4,450.61 crore in September, up 71% from August and the strongest monthly inflow since January, even as global gold prices fell about 8.5% that month, according to the World Gold Council. Gold and other precious metals have also remained popular as a hedge against currency weakness and geopolitical risk, even as higher yields make non-interest-bearing bullion less attractive.
For policymakers, the concern is less about day-to-day trading than about limiting incremental import demand. Higher gold purchases can widen the trade deficit and increase demand for dollars, adding pressure to the rupee at a time when India is already contending with a heavy oil bill and capital outflows. The Reserve Bank of India added to the mix on 7 October by raising its repo rate by 25 basis points to 5.50% and lifting its inflation forecast, a reminder that the authorities are trying to balance price pressures, growth and currency stability at the same time.
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