Goldilocks to Locking in Gold: Misread Signals, Austerity and Market Reactions

The timing seems largely inopportune: just as the general optimism regarding double engine growth in hitherto uncharted states gained momentum, comes the news of the engine running into trouble. Following Prime Minister Narendra Modi’s ‘most drastic’ appeal for austerity measures on May 11th, 2026, both equity markets and rupee have crashed.

Rupee breached an all-time high of 96.13 to a dollar (May 15), while Nifty tanked down to 23262 levels (May13) (Chart 1). While till date, the overarching narrative was one of resilient growth and controlled inflation, the sudden shift to austerity measures to save the economy has made the markets jittery. Was the Goldilocks narrative, then, a misreading? Is the paradise showing cracks, as we tumble from Goldilocks to locking in gold in a period of less than three months? 

First, the recent appeal from the Prime Minister regarding austerity measures is probably not restoring the confidence of market participants. The measures broadly focus on conserving dollars, in an attempt to prevent rupee depreciation: controls on gold imports, appeal to buy less gold, restrict foreign travel, reduce use of fertiliser and cooking oil, and finally conserve use of petrol, gas, and diesel. Questioning the effectiveness of austerity measures is crucial; but far more important at this stage is identifying who is likely to bear the burden of restraints, if imposed. As with demonetisation and Covid regulation, will the measures, including the steep hike in import duties, act as a regressive tax? 

Austerity, like charity, begins at home. India’s fiscal and administrative machinery, with its long-standing bureaucratic traditions, has historically shunned any substantive austerity. Unless restrictions on foreign travel, gold purchase-curbs, and measures such as work from home begin with those in positions of power, it is difficult to imagine any impact on the rest of the populace. In such a case, even a one-off symbolic gesture led by a dynamic Prime Minister may be unlikely to suffice.

India’s growth story and linkages across sectors is far from simple: with a vast unorganised sector connected through a vital lifeline of resources including labour and raw materials to the organised sector, possibility of work from home is for the few privileged.  In a country spread across vast distances, with an incessant crisscrossing of goods and people through a densely populated nation, the impact of work from home for those few privileged would be a drop in the ocean. A more meaningful response could be a rapid augmentation of planned public transport infrastructure aimed at reducing use of fuel consumption. But it is unlikely to happen overnight.

Curb on gold and hike in import duty appears straightforward enough: but may have a detrimental impact on India, with the exports from Gems and Jewellery industry contributing to the tune of $29.82 billion in 2024-25 (close to 7%) of export earnings. An import duty hike may, at this juncture, reduce consumption, but the industry could face severe unintended consequences.

The industry also has substantial exposure to bank credit, and hence any setback would have multiple ripple effects. In 2013, the RBI attempted to manage this dilemma through the 80:20 scheme, which required a portion of gold imports to be earmarked for exports.  This time around, till date, there has been no such discussion on how impact of import duty on Gems and Jewellery sector can be moderated.

Chart 1: Trends in forex and equity markets

Source: LSEG, Author’s annotations

Second, the root source of concern remains the rupee exchange rate. As seen in Chart 1, rupee and the equity markets have been under pressure before the beginning of the war. With even dollar going down, as seen from DXY in Chart 2, rupee remains one of the few currencies to have sustained depreciation.

This suggests the root of the depreciation may not just be speculative actions on rupee, but intrinsic strength of the currency. Nominal GDP growth has seen a sustained fall in the last few years, more so after the revision of the base year. Barring the last one year of benign inflation, inflation has been volatile and largely dependent on food inflation movement.

Chart 2: Peer group currency movement

Source: LSEG

The key point emerging therefore is that the rupee depreciation could have a root in more fundamental factors, than being seen. In this situation the reported direct intervention by the central bank may not be effective or desirable (Roy Trivedi and Das, Jan 2026, April 2026). The knee-jerk reaction coming from the central bank, including curbs on bearish bets in offshore markets on April 1 and their partial rollback after 20 days, after the initial NOOP tightening on March 27, sends wrong signals to the market.

To add to the confusion, the monetary policy statement of the RBI Governor simultaneously speaks of the rupee as a market-determined currency. Speculation in this case need not necessarily reflect investor lack of confidence in the rupee, but may simply stem from the back-and-forth signals on capital convertibility. Capital convertibility is ideally a one-way street; there is no turning back. As former Governor D. Subbarao succinctly put it, “it is like joining the mafia.”

Investor confidence has hardly been unequivocal: Chart 3 shows FDI and FPI for 2024-25, and separately for 2024-25 quarters, which highlight the dwindling FPI flows and limited FDI investment. In fact, because of weak investor confidence, both FII and FDI flows into India have at best been intermittent and at worst precariously low. If we want global investors to be confident of our markets, policy credibility and predictability in capital account management is probably more important than growth fundamentals.

Chart 3: FDI and FPI flows in 2024-25 and 2025-26

Source: RBI data, Authors’ calculations

In hindsight, attempts to keep the rupee more stable than usual throughout the run-up to the 2024 elections, over nearly two years, may have led to a serious misalignment down the line. As India is one of the few economies with strong growth, it must embrace the changes in exchange rates that come with being open to the global economy.

Allowing a market-led correction until the currency aligns with levels markets expect would serve exporters and also give the RBI some breathing room in containing excessive volatility in the rupee. The current crisis clearly shows that India is not prepared to handle yet another energy crisis. Reforms to meet the country's energy demand on a sustainable basis are critical. At the same time, it is important at this point to signal to the markets that India remains committed to capital openness. There is a need for clearer, more consistent communication.

*Views are personal