Mutual Funds have emerged as major buyers of gold in recent years through Gold Exchange Traded Funds (Gold ETFs). Under existing regulations, Gold ETFs must be fully backed by gold of 99.5% purity. These reserves are stored in Mumbai, GIFT City in Gujarat, and select overseas financial centres. International custodians such as Standard Chartered, HSBC, and JPMorgan Chase play a major role in this activity, while Indian institutions including ICICI Bank and HDFC Bank are also involved. Oversight of these gold holdings and their purity is undertaken by SEBI, trustees of mutual funds, and independent auditors.
In 2025 alone, Mutual Funds purchased nearly 45 tonnes of gold worth approximately US$6.9 billion (around ₹59,000 crore) for Gold ETF operations. The total gold holdings of Mutual Funds currently stand at nearly 95 tonnes, valued at about US$14.5 billion or ₹1.2 lakh crore.
The trend clearly indicates that investors are increasingly preferring Gold ETFs as a convenient and secure mode of investing in gold. These instruments enable hassle-free purchases, even in quantities as small as one gram, while ensuring competitive returns. More importantly, investors can hold gold in digital form, thereby avoiding the challenges of physical storage, security, and handling.
However, the rapid expansion of Gold ETFs also has serious foreign exchange implications because almost the entire quantity of gold required for these operations is imported. India therefore needs to devise a mechanism that can reduce dependence on imported gold without disrupting the growth of Gold ETF operations.
This paper proposes one such policy option.
India's Vast Untapped Gold Wealth
India is believed to possess the largest private gold holdings in the world. Estimates suggest that between 25,000 and 35,000 tonnes of gold are held privately, of which nearly 5,000 tonnes are believed to be owned by Hindu temples. At current market prices, this represents a staggering value of nearly US$4.5 trillion or about ₹382 lakh crore — a figure larger than India's present GDP.
This accumulation has taken place over centuries because gold occupies a unique social, cultural, and religious position in Indian society.
By comparison, the Reserve Bank of India officially holds only around 880 tonnes of gold, though even this places the RBI among the world's top ten central banks in terms of gold reserves.
Successive governments have attempted to mobilise this vast idle stock of gold for productive economic use. One of the most notable initiatives was the Sovereign Gold Bond Scheme introduced in November 2015. Under this scheme, individuals could deposit gold with designated banks for eight years and receive the equivalent market value along with annual interest of 2.5% to 2.75%. To improve liquidity, these bonds were listed on stock exchanges.
Despite these efforts, no gold mobilisation scheme has fully achieved its intended objectives. Large quantities of privately held gold continue to remain locked away in homes, lockers, and temple vaults. It is therefore important to analyse why earlier schemes failed and what incentives may be necessary to encourage broader participation.
Fortunately, India now has an opportunity to design a more attractive and economically meaningful framework.
A New Gold Recycling Model for Mutual Funds
The gold requirement of Mutual Funds for Gold ETF reserves may rise from the present annual level of around 50 tonnes to nearly 75 tonnes over the next five years. If this demand continues to be met entirely through imports, pressure on India's foreign exchange reserves and the rupee will intensify.
The Government may therefore consider a policy under which Mutual Funds are encouraged — or required — to source a significant part of their gold requirements through recycled domestic gold rather than imports.
A new financial product could be introduced specifically for this purpose. Under such a framework, Mutual Funds would be incentivised to mobilise gold from temples, households, and other domestic holders in exchange for attractive financial returns and tax concessions.
Such a policy could gradually shift the sourcing pattern of Mutual Funds away from imported gold towards domestically recycled gold. With proper incentives and institutional support, Mutual Funds may succeed where earlier government schemes struggled — namely, in unlocking idle domestic gold reserves and bringing them into the formal economic system.
The Strategic Role of GIFT City
Almost all leading Mutual Funds in India already have a presence in GIFT City, Gujarat — India's first and currently only international financial services centre. Major global economies operate multiple offshore financial centres that offer favourable tax regimes and flexible regulatory environments to attract capital and financial activity.
The original objective behind GIFT City was to create such an ecosystem within India itself.
This presents a timely opportunity for the Government to introduce a specialised Gold Mobilisation Scheme exclusively through GIFT City, with carefully designed tax incentives for both investors and Mutual Funds.
Under the proposed model, Mutual Funds could issue five-year gold-linked bonds to temples and private gold holders. The return offered may be linked to prevailing five-year fixed deposit rates offered by leading commercial banks. Gold deposited under the scheme would be valued at prevailing Bombay Bullion rates on the date of deposit.
For accounting and regulatory purposes, these investments could be deemed domiciled in GIFT City even if the gold is initially collected elsewhere in India through authorised banking channels. Four major banks — two public sector and two private sector institutions — may be designated to facilitate such operations.
Underlying gold reserves would remain stored within secure vaulting infrastructure already available in GIFT City.
Tax Incentives and Economic Benefits
To make the scheme attractive, all income generated from such gold-linked bonds may be exempted from taxation as long as the underlying assets remain within GIFT City. This exemption could include waiver of GST currently applicable on gold purchases. The proposed tax concessions would incentivise Mutual Funds to actively mobilise recycled gold from domestic sources rather than relying on imports.
Such a system would generate multiple economic benefits:
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Reduction in Gold Imports: Gold ETF operations would become less dependent on imported gold, thereby reducing pressure on India's foreign exchange reserves and supporting the stability of the rupee.
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Productive Use of Idle Assets: Large quantities of gold currently lying idle in homes, lockers, and temple vaults would enter the formal economic cycle and contribute to economic growth.
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Enhanced Liquidity for Temples and Households: Temples and private individuals would receive liquid financial assets in exchange for idle gold while continuing to earn regular returns.
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Expansion of Social and Religious Activities: Additional income earned by temples could support broader charitable, educational, religious, and welfare activities benefiting local communities.
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Strengthening GIFT City: The initiative would reinforce the strategic importance of GIFT City as a global financial centre capable of hosting innovative financial products and services.
Need for Institutional Consolidation
The Mutual Fund industry may also consider establishing a dedicated corporate entity to manage gold reserves centrally. At present, gold reserves are held across multiple institutions and locations, both domestic and international.
Given the rapid growth of Gold ETF business, the industry could establish a specialised subsidiary — for example, "MF Gold Holding Company Ltd." — headquartered in GIFT City with its own integrated vaulting and reserve management infrastructure.
As an additional incentive, Mutual Funds participating in domestic gold mobilisation may be granted exemption from the current 3% GST applicable on gold purchases.
Looking Beyond GIFT City
India is widely expected to become the world's second-largest economy within the next two to three decades. Major economies such as the United States and China operate multiple offshore financial centres that help attract investment, retain capital, and support economic expansion. India, by contrast, currently has only one such centre — GIFT City — established in 2015. The country needs additional international financial centres in strategically important regions such as Lakshadweep and the Andaman & Nicobar Islands.
Such centres could stimulate local economies through development of modern ports, airports, roads, and financial infrastructure while also generating employment opportunities.
Private sector participation from leading Indian business groups could be encouraged for developing such centres without imposing significant financial burden on state or central governments.
Over time, this may even encourage Indian clients currently operating through overseas financial centres to shift their activities back within India's sovereign jurisdiction.
Conclusion
India possesses one of the world's largest untapped reserves of privately held gold. At the same time, Gold ETFs are becoming an increasingly important investment instrument requiring substantial quantities of gold.
A carefully designed policy framework that connects these two realities can simultaneously reduce gold imports, strengthen India's foreign exchange position, deepen financial markets, and unlock idle domestic wealth for productive use.
With appropriate tax incentives, institutional support, and a central role for GIFT City, India has an opportunity to create a transformative financial model that aligns national economic priorities with investor interests.
K. Kamalaksha is a former senior banker with State Bank of India, having served in India and London. He writes on economics, monetary policy, and national development.