According to a strategy note by Kotak Institutional Equities, a significant increase in flows into local gold ETFs and emerging market (EM) equity ETFs indicates increased speculative activity and may have broader effects on the Indian economy and markets.
Sanjeev Prasad of Kotak Institutional Equities wrote in the most recent note, “Speculating about’speculative’ flows,” that “The substantial rise in recent flows into domestic gold ETFs and EM equity ETFs suggests high levels of speculation among investors, perhaps with intriguing consequences for the Indian market and economy.”
EM ETFs witness a significant increase
According to Kotak, there has been a “strong jump in inflows” into EM shares in recent weeks, and ETF flows have increased even more sharply. Kotak characterized this trend as the “normal” propensity of flows chasing performance.
After months of outflows, foreign portfolio investor (FPI) flows turned positive in February thanks to India receiving its “due share of EM ETF flows.” “Net active FPI inflows into India continue to be negligible,” the brokerage stated.
The letter pointed out that throughout the past month, ETF inflows to India had averaged about $1 billion per week.
Cooling retail equity flows
Inflows into domestic equities mutual funds have also decreased. According to Kotak, there has been a “severe slowdown in small-cap and theme funds” and a “moderate slowdown in equity MF flows.”
The moderation may be due to the “usual pattern of flows chasing performance (or the lack of the same)” or to high net worth investors “finding new avenues of investment or speculation such as precious commodities,” according to the brokerage, which follows poor market performance in mid- and small-caps over the previous few quarters.
In recent weeks, inflows of domestic institutional investors have also decreased.
Gold purchases spike significantly
According to Kotak, the more notable development is in gold. In January 2026, inflows of Rs 240 billion into domestic gold ETFs “dwarfed the flows in prior months.”
The global increase in gold ETF investments, according to the brokerage, suggests “huge speculation in gold (together with silver) possibly.”
It went on to say that it was unclear if the increase was due to a “loss of trust of a sector of families in the current monetary system” or a move away from the demand for actual gold. The note stated, “We presume it is the former, since the latter is too terrifying to understand.”
Implications for liquidity and CAD
Kotak stated that robust physical gold imports and ongoing sizable inflows into gold ETFs “may pose problems to India’s CAD.” Large current account deficits and capital outflows “would hamper reserve money generation, domestic liquidity, and deposit creation,” it continued, adding that “any reversal in recent FPI inflows to outflows may impact on India’s BoP.”
The statement went on to say that households’ purchases of physical and financial gold amount to capital exports from the nation. India’s net imports of gold and precious stones have greatly outpaced net foreign direct investment flows during the last 15 to 16 years. According to Kotak’s comment, this is a dynamic of continuous capital outflow through gold purchases.
The brokerage’s statement maintains its macro estimates but says it is worth keeping an eye on the recent surge in gold ETF purchases and passive EM flows for its wider ramifications.
