For generations, gold has occupied a unique place in Indian households, serving as jewellery, a form of savings and a financial cushion during difficult times. But there was a period when owning certain forms of gold was illegal. In the late 1960s, families across India began finding discreet ways to store their precious metal. Jewellery and gold were tucked away in cupboards, concealed compartments and other private spaces as households adjusted to a sweeping government policy.
The trigger was the Gold (Control) Act, 1968, introduced with the objective of reducing gold imports, conserving scarce foreign exchange and encouraging people to move their savings into the formal banking system.
The policy, however, produced consequences that policymakers had not fully anticipated. Instead of eliminating India’s appetite for gold, the restrictions helped drive parts of the market underground, contributing to smuggling and a parallel economy.
Why India Tried To Control Gold
India’s gold restrictions emerged against the backdrop of severe economic pressure. The country had faced foreign exchange difficulties following the 1962 war with China and subsequent economic challenges. The government was particularly concerned about the amount of foreign currency being spent on imported gold. Policymakers hoped that limiting private ownership of bullion would reduce demand for imports and preserve the country’s dwindling foreign exchange reserves.
The Gold (Control) Act placed major restrictions on the possession and trade of gold in bar and coin form. Goldsmiths and jewellers were also subjected to holding restrictions, while newly manufactured jewellery was required to meet a maximum purity of 14 carats.
That represented a major departure from India’s traditional preference for higher-purity gold, particularly 22-carat jewellery.
The government’s broader objective was to redirect household savings towards banks and other formal channels, where those funds could potentially support economic development. But gold had a special place in Indian society that went far beyond its financial value.
For many households, jewellery represented stridhan, family wealth, a cultural asset and an emergency source of funds. Restricting access to the metal therefore proved difficult to reconcile with deeply established social and financial practices.
How The Gold Ban Helped Create A Black Market
The restrictions did little to eliminate demand. Instead, consumers largely remained unwilling to accept jewellery made with the newly mandated lower purity. Traditional goldsmiths were among those who faced the sharpest impact. Many artisans struggled because they lacked the necessary licences or found that customers were unwilling to purchase 14-carat jewellery.
As legitimate avenues narrowed, an illegal supply chain expanded. Smuggling networks began bringing high-purity gold into India, particularly through routes originating in the Middle East. Bombay, now Mumbai, emerged as an important centre for the underground gold trade.
Smugglers reportedly used increasingly creative methods to transport bullion, concealing gold in everything from vehicle components to ship machinery and diplomatic baggage.
The illegal trade also made gold substantially more expensive. Imported bullion in the unofficial market could command a premium estimated at 40 per cent to 80 per cent over London bullion prices, illustrating how restrictions had distorted the market rather than eliminating demand.
The episode demonstrated a familiar economic dilemma: when a heavily demanded product becomes difficult to obtain through legal channels, consumers and suppliers can turn to informal markets.
Why The Gold Control Act Was Repealed
After more than two decades, the government eventually moved away from the restrictive approach. The Gold (Control) Repeal Act was passed on June 6, 1990, during the tenure of Finance Minister Madhu Dandavate. By then, the policy had failed to deliver the transformation policymakers had initially hoped for. Traditional jewellery businesses had suffered, illegal trading networks had expanded, and gold continued to occupy an important place in household savings.
The government increasingly recognised that a system allowing legal imports, combined with taxation and duties, could be more effective than driving the entire trade underground.
Yet the end of gold controls came at a particularly dramatic moment in India’s economic history.
1991: When India Had To Pledge Its Gold
Barely a year after the repeal, India found itself facing a severe balance of payments crisis. Foreign exchange reserves had fallen to levels sufficient to cover only a few weeks of imports. The country urgently needed access to foreign currency, and gold became part of the emergency response.
The Reserve Bank of India undertook a highly sensitive operation involving the physical transfer of gold from its vaults.
Officials identified bullion meeting international standards, after which the gold was weighed, verified, insured and prepared for transportation. Security arrangements were put in place as the consignments moved from RBI facilities in Mumbai to the airport.
Beginning in July 1991, a total of 46.91 tonnes of gold was transported overseas in multiple consignments, with much of it transferred to the Bank of England in London as collateral for emergency financing.
The secrecy surrounding the operation was crucial. Authorities feared that advance knowledge of the transaction could deepen market anxiety and make India’s already difficult financial position worse.
Eventually, however, reports of the gold transfers emerged, turning images of bullion being loaded onto aircraft into one of the defining visual memories of India’s 1991 economic crisis.
The gold-backed financing did not resolve the underlying weaknesses in India’s economy. What it provided was something equally important at the time: breathing room. The crisis forced India to undertake major structural changes. Under Prime Minister P V Narasimha Rao and Finance Minister Manmohan Singh, the government moved towards sweeping economic reforms.
The rupee was devalued, industrial licensing was dismantled, trade restrictions were eased, and foreign investment rules were liberalised. These measures marked a decisive departure from India’s earlier economic model and laid the foundation for a more open economy.
The gold pledged during the crisis was eventually recovered after the emergency loans were repaid. India therefore did not permanently surrender the bullion used as collateral.
From Emergency Asset To Strategic Reserve
The role of gold in India’s financial story looks very different today. The RBI’s gold holdings have expanded considerably since the 1991 crisis. The central bank currently holds 880.52 tonnes of gold, more than twice the quantity held around the period of the crisis. Gold has also become a more important component of India’s foreign exchange reserves.
According to the figures cited in the source material, gold accounted for 13.92 per cent of India’s forex reserves in September 2025, rising to 16.70 per cent in March 2026 and 16.85 per cent in May 2026.
The increase has not been driven only by additional accumulation. Rising international gold prices have also significantly increased the value of the RBI’s existing holdings. During 2025-26, the value of gold recorded as an asset of the RBI’s Banking Department increased by more than 63 per cent.
The contrast is striking. A metal that the government once attempted to restrict in households eventually became an important component of India’s own financial safety net.
