Can tax changes on gold, foreign investments be India’s next move amid oil shock risks?

India may eventually need to consider tougher policy interventions, including possible tax changes related to gold and foreign investments, if elevated oil prices and geopolitical tensions continue to pressure the economy, according to Kotak Institutional Equities. The brokerage believes a prolonged disruption in global oil and gas supplies could worsen India’s macroeconomic position and force policymakers to look beyond conventional responses.

In its latest India Strategy report, ‘Appeal to Action’, Kotak Institutional Equities argued that India’s economic vulnerabilities have increased following the escalation of the West Asia conflict. The brokerage interpreted the Prime Minister’s recent call for reduced fuel usage, lower gold imports and moderation in overseas travel as a signal that policymakers are becoming increasingly cautious about the economic impact of high energy prices and external pressures.

Oil shock risks

Kotak Institutional Equities warned that India’s macroeconomic indicators have weakened materially since the beginning of the conflict. According to the report, pressures are becoming visible across the current account deficit (CAD), inflation outlook, fiscal balances and capital flows.

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The brokerage estimated that every $10-per-barrel increase in crude oil prices could widen India’s current account deficit by nearly $22 billion, equivalent to around 55 basis points of GDP. At the same time, oil marketing companies are estimated to be facing monthly under-recoveries of nearly ₹30,000 crore because of elevated crude prices and constrained fuel pricing.

The report suggested that prolonged pressure could eventually force the government to adopt stronger measures involving pricing and taxation.

Gold under fresh focus

Among the potential areas of policy action, Kotak Institutional Equities highlighted gold imports. India recently increased customs duty on gold and silver imports to 15% from 6% as part of efforts to reduce overseas purchases and contain pressure on foreign exchange reserves. India remains the world’s second-largest consumer of precious metals, making gold imports a significant contributor to the country’s import bill.

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Kotak argued that if current account pressures intensify further, policymakers may explore additional tax changes to curb demand for gold and manage external balances.

The brokerage noted that India could have limited options to ease pressure on the current account deficit and balance of payments without resorting to stronger interventions.

“The Indian government may have limited options to manage the immediate pressures on CAD/BoP without taking ‘harsh’ measures,” the report said.

While the report did not specify exact proposals, it pointed toward taxation-related measures as a possible policy tool.

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Foreign investment

Alongside restrictions aimed at curbing imports, Kotak Institutional Equities also floated the possibility of tax measures designed to encourage foreign capital inflows.

The brokerage suggested that policymakers could consider lowering capital gains taxes on equities for foreign investors to improve overseas participation in Indian markets. Such a step, if implemented, could support capital inflows and strengthen India’s balance of payments during periods of external stress.

Kotak clarified that these are analytical possibilities and not measures currently under policy discussion.

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Adverse scenario

Under its adverse scenario, Kotak projected average crude prices at $100 per barrel in FY27 compared with its earlier estimate of $65 per barrel. Under this assumption, India’s current account deficit could widen to 2.6% of GDP from 1%.

The brokerage also estimated GDP growth could slow to 6% from 7%, while consumer inflation may rise to 5.2–6%. It warned that sustained inflationary pressures could prompt 50–100 basis points of repo rate hikes beginning October 2026.

Despite these concerns, Indian equity markets have remained resilient, supported by strong domestic inflows and retail participation. Kotak, however, believes markets may eventually need to shift attention from momentum-driven themes toward crude prices, inflation, fiscal pressures and external risks.