India's gold loan rally faces its biggest test: What happens if gold prices correct?

Gold prices may have eased from their record highs, but India's gold loan market is showing little sign of slowing. Yet, as lenders expand aggressively, the biggest question is whether this growth can withstand a prolonged correction in bullion prices.

The Reserve Bank of India's latest Financial Stability Report (FSR), analysed by Elara Securities, suggests that the sector remains fundamentally strong, even as regulators caution that volatile gold prices warrant close monitoring. At the same time, the World Gold Council (WGC) believes that while gold could see further downside in the near term, structural demand from central banks, investors and India itself could prevent a deep and prolonged correction.

Gold loans are booming

Gold has become one of India's fastest-growing lending segments. According to Elara Securities, gold loans expanded at a compound annual growth rate (CAGR) of about 42% during FY24-FY26, almost double the growth of other non-housing retail loans.

The momentum has been particularly strong among NBFCs, whose gold loan books nearly doubled with 96.5% year-on-year growth in FY26, significantly outpacing the industry's overall growth of 54.5%. Gold loans now account for 17.4% of NBFC retail portfolios, while their share in outstanding consumer credit has climbed to 11%.

MUST READ: Gold, silver prices today (July 1): Yellow metal stays below ₹1.5 lakh, silver remains stable; check latest rates here

Why are the risks still contained

Normally, a sharp fall in gold prices would raise concerns over collateral values, forcing lenders to demand additional security or auction pledged jewellery.

However, current lending practices provide an important cushion.

The RBI notes that the average loan-to-value (LTV) ratio remains below 60%, giving lenders considerable protection even if gold prices soften. Equally important, only around 6% of gold loan originations are from new-to-credit borrowers, suggesting that most borrowers already have established repayment histories. Slippages across NBFCs have also declined, while capital adequacy remains a comfortable 24.6%, indicating that the sector is entering this phase from a position of strength.

But the biggest risk remains gold itself

The World Gold Council believes the current macro environment does not point to a collapse in gold prices.

Its base case is for gold to remain largely range-bound within about ±5% during the second half of 2026 under current macroeconomic conditions. A stronger global economy, rising interest rates and improved investor appetite for risk could lead to a 5-15% correction, while worsening geopolitical tensions or weaker growth could revive the rally.

MUST READ: India's higher gold import duty could cut demand by up to 60 tonnes in 2026: WGC

Importantly, the WGC argues that even if gold declines by 10-15%, further downside is likely to be limited because lower prices historically attract buying from consumers, long-term investors and central banks. Since 2022, central banks have purchased around 1,000 tonnes of gold annually, providing structural support to prices.

India could become the swing factor

India occupies a unique position in the global gold market. As the world's second-largest gold market, with annual net demand of roughly 800 tonnes, any slowdown in domestic buying can influence global demand dynamics.

The WGC estimates that India's recent increase in gold import duty—from 6% to 15%—could reduce jewellery, bar and coin demand by 50-60 tonnes, or roughly 10% year-on-year. While much of this impact is already reflected in prices, a broader economic slowdown could further weaken consumer demand.

For the gold loan industry, that creates a second layer of risk. If weaker economic conditions coincide with lower gold prices, stressed borrowers may find it harder to redeem pledged jewellery. The WGC has also cautioned that defaults on collateralised gold loans could rise in such a scenario, increasing the supply of recycled gold in the market.

MUST READ: Not just homes: Why Mumbai's real estate is increasingly competing with stocks, bonds and gold

Rally likely to moderate, not reverse

For now, however, the evidence suggests India's gold loan boom is unlikely to unravel simply because gold prices cool.

Unlike previous cycles, today's market is supported by conservative LTV ratios, improving asset quality, repeat borrowers and stronger capital buffers. Unless gold experiences an unusually sharp and sustained decline alongside a meaningful deterioration in the economy, the sector appears well-positioned to absorb moderate price corrections.

The bigger challenge may therefore be not whether gold loans survive a correction, but whether lenders can maintain their breakneck pace of growth once rising gold prices stop doing much of the heavy lifting.

MUST READ: How your investments are taxed in 2026-27: ITR filing guide for stocks, FDs, gold, mutual funds