Sebi gold pricing shift: A step toward India-led price discovery

In a recent order, Sebi directed mutual funds to use domestic stock exchange spot prices to value their physical gold and silver holdings from April 1. At present, they rely on prices published by London Bullion Market Association (LBMA).

India's MF industry manages nearly ₹80 lakh cr in assets, while gold ETFs and gold funds account for about ₹70,000 cr, around 1% of industry assets. Physical gold holdings through ETFs are estimated at 65-70 t. Yet, this regulatory shift reveals deeper structural features of India's gold economy, and hints at a broader strategic direction.

Sebi's motivation is practical. AMCs valued gold using the LBMA AM price and then applied adjustments: converting ounces into grams, translating dollars into rupees, adding import duties and taxes, and estimating domestic premiums or discounts. These layers introduced discretion. Different fund houses could apply different adjustments, meaning that two funds holding identical gold might report marginally different net asset values (NAVs).

By switching to domestically-polled spot prices published by Indian exchanges, this subjectivity has been removed. The change improves transparency and consistency in valuation.

Another reason the shift makes sense lies in divergence between international and domestic gold prices. Indian gold prices don't mirror LBMA prices converted into rupees. They incorporate import duties, taxes, logistics costs, exchange-rate movements and local demand conditions. RBI statistics indicate that the difference between Mumbai gold prices and London reference price (after currency conversion) has averaged several thousand rupees per 10 g in recent years.

The spread has widened, as import duties and local premiums have fluctuated with policy changes and seasonal demand. When the domestic market systematically trades away from the global benchmark, a valuation method built on LBMA-plus adjustments becomes increasingly approximate. A domestic reference price is, therefore, more accurate for Indian investors.

The move carries a broader institutional signal. India is the world's second-largest consumer of gold, accounting for roughly one-fifth of global demand. Yet, it has had limited influence over how gold prices are formed. Global benchmarks remain concentrated in Western financial centres - primarily London's over-the-counter bullion market, and New York's COMEX futures market. Asia dominates physical demand, but the financial infrastructure of price discovery largely sits outside the region.

China has attempted to shift this balance by developing Shanghai Gold Exchange, and introducing Shanghai Gold Benchmark in 2016. India has taken smaller steps, including launching India International Bullion Exchange (IIBX) in GIFT City. India's shift away from LBMA-linked valuation is a modest step toward acknowledging that the price of gold in India may increasingly be determined in India itself.

Indian households are estimated to hold 25,000-27,000 t of gold, one of the largest private stocks in the world. At current prices, this is worth well over $1.5 tn. At the same time, India imports 700-900 t of gold annually, creating recurring pressure on CAD.

Successive governments have tried to shift gold demand from physical metal into financial instruments. Sovereign gold bonds (SGBs) launched in 2015 allowed investors to gain exposure to gold prices while earning a small interest rate. Gold ETFs and gold MFs were intended to offer similar exposure.

Gold monetisation schemes have attempted, with limited success, to mobilise idle household gold deposits into the banking system. Progress has been minimal, and financial gold products remain a tiny fraction of total gold holdings.

Regulators, however, continue to build the infrastructure needed if these markets expand in the future. The shift toward domestic price benchmarks can be seen as part of that infrastructure-building process. If gold ETFs and financial gold products grow significantly, the benchmark used for valuation will become increasingly important.

One possibility is that such regulatory steps are laying the groundwork for a larger policy shift. A large share of Indian households' gold holdings remains outside the formal financial system. Some countries have experimented with ways to bring these stocks into the financial net: Italy has explored tax-based disclosure of undeclared gold holdings, while Turkey has encouraged households to deposit jewellery with banks under its gold-banking programme.

Whether India attempts a similar mobilisation effort remains uncertain. But if such a policy emerges, financial architecture now being built around domestic pricing, bullion exchanges and gold funds may prove to be an important precursor. Even small technical reforms could be laying the groundwork for integrating India's vast private gold stock into the formal economy.