India’s gold market just delivered a masterclass in unintended consequences. MCX gold futures dropped 1.93% on June 10 to ₹149,500 per 10 grams, their lowest level since May 5, effectively erasing every rupee of price increase triggered by the government’s aggressive import duty hike less than a month earlier.

The duty hike that backfired

Between May 12 and 13, India raised the effective import tariff on gold and silver from 6% to 15%. That’s the largest single increase on record for Indian gold duties.

The rationale was straightforward enough. Curb gold imports, support the rupee, and give the national currency some breathing room. For about five minutes, it worked. Domestic prices spiked on the tariff news.

Then global gold prices started sliding, and the math stopped mathing.

The duty hike was supposed to add a significant premium to imported gold, making it costlier for Indian buyers. But when international prices fall hard enough, that premium evaporates. That’s exactly what happened. Indian gold is now cheaper than it was before the government intervened at all.

Demand cratered, discounts ballooned

The immediate aftermath of the duty increase was brutal for India’s gold market. Industry estimates suggest demand dropped roughly 70% in the two weeks following the hike, falling to approximately 7.5 tonnes compared to around 25 tonnes during the same period the prior year.

Physical gold in Indian markets began trading at steep discounts, reportedly as much as $150 per ounce below official landed prices. That kind of gap between local trading prices and the theoretical import cost signals that buyers simply walked away.

Prime Minister Narendra Modi reportedly called on citizens to limit gold purchases, reinforcing the government’s broader strategy.

A policy whiplash problem

This isn’t India’s first dance with gold import duties as a policy lever. The 15% tariff actually reverses a 2024 cut that was designed to curb smuggling. That earlier reduction acknowledged a fundamental truth: when you make legal gold too expensive, people find other ways to get it.

The policy ping-pong creates its own set of problems. Jewelers, refiners, and bullion dealers struggle to plan inventory when tariff rates swing by 9 percentage points in the span of a year. Consumers who bought gold at post-hike prices are now sitting on assets worth less than what they paid. And smuggling networks that were supposedly dismantled by the 2024 cut now have fresh economic incentive to restart operations.

What this means for investors

For traders specifically, the current environment demands close attention to two variables: international gold price trends and the USD/INR exchange rate. Indian gold prices are a derivative of both, and the duty hike has made the relationship more volatile, not less.

One dynamic worth watching: if smuggling picks up in response to the 15% duty, as many market observers expect, that parallel supply could further suppress official market prices while simultaneously undermining the government’s revenue goals. The 2024 duty cut was implemented precisely because this pattern had become unsustainable.