The Indian government has raised the import duties on gold and silver sharply, setting the new rates at 15% from the previous 6%. This move comes just days after Prime Minister Narendra Modi urged the public to avoid purchasing gold for the next year, in response to the growing economic strain caused by the Iran war and the pressure on India's foreign exchange reserves.

The government's decision involves a 10% basic customs duty along with an additional 5% Agriculture Infrastructure and Development Cess (AIDC). The aim of this hike is to control the inflow of gold and silver, narrow the trade deficit, and stabilize the rupee, which recently hit an all-time low of 95.75 to the dollar.

While earlier reports suggested there were no immediate plans to increase the duties, the government's latest move has now raised concerns about its impact on domestic gold and silver demand. India, as the world's second-largest consumer of gold and the largest consumer of silver, heavily depends on imports to meet its domestic needs. The rise in prices over the last year, combined with this new duty increase, is expected to further dampen consumption.

The government had already started tightening gold imports with a 3% integrated GST (IGST) on gold and silver imports, which caused a significant drop in imports in April. Now, with the latest duty hike, bullion dealers expect a further decline in imports. However, there are concerns that higher taxes could lead to a resurgence in gold smuggling, which had previously eased after tariff reductions in mid-2024.

Prime Minister Modi's appeal for austerity, including avoiding gold purchases for weddings and reducing non-essential foreign travel, aims to manage the economic impact of the Iran-US conflict and the rising global crude oil prices. While India has so far remained largely insulated from the effects of the oil shock, the government is preparing for potential inflationary pressures that could further strain the economy.