Silver exchange traded funds may turn premium after import restrictions

MFs eye further clarity, expect physical silver supply constraints if demand shoots up

Silver exchange traded funds (ETFs) are likely to trade at a premium to spot silver prices for at least a few sessions starting Monday. This comes as the mutual fund (MF) industry anticipates possible supply constraints in the physical silver market, particularly if demand surges following the newly-imposed import restrictions. 

Monday will be the first trading session for silver ETFs after the government restricted silver imports, including silver bars that form the underlying asset of silver ETFs. Silver ETFs are de­signed to track domestic silver prices, but they can deviate during periods of exc­eptionally strong demand or supply issues. 

In such situations, ETFs tend to trade at a significant premium to silver prices on exchanges as they are unable to procure enough physical silver bars at the right price to create fresh units and meet the spike in investor demand. 

Under current regulations, gold and silver ETFs can issue new units only after they acquire the equivalent quantity of physical gold or silver. In the absence of fresh units, the price of gold and silver ETFs start to get regulated by the demand-supply situation of the units in exchanges rather than the real value of the underlying asset. 

According to MF executives, India produces significant quantities of silver and there is availability of silver bars with suppliers for now. They added that a sharp spurt in demand could lead to difficulties for ETF managers to keep the prices in line with their underlying value. 

“Unlike gold, India has sizeable production of silver. Also, industrial imp­orts may likely continue and recycling may go up. But yes, the domestic premium may rise,” said a senior fund manager. 

According to another executive, currently it is unclear whether the government will provide licences for import of silver for investment purposes. Unless there is clarity and supply stabilises, he said, both physical silver and ETFs will trade at a premium to the exchange prices. 

“While there is reasonable inventory of silver bars with bullion traders and they will try to manage liquidity from other channels, it is likely that in light of the restrictions, the physical silver and hence silver ETFs will start quoting at higher levels on Monday,” the executive said. 

Last week, spot gold and silver were trading at a discount to the MCX futures. The discount also reflected in the gold and silver ETF pricing. The lower prices were a result of offloading by importers and institutional investors post the hike in import duty on gold and silver to 16 per cent from 6 per cent. 

Industry sources said that many of these players benefitted from the hike, as they had imported the precious metal just before duty was increased. 

Silver ETFs had late last year faced physical silver supply issues. Several silver ETFs traded at significant premiums to spot prices and their net asset values (NAVs) for multiple weeks in October. This was due to inadequate availability of physical silver to meet rising investor demand. 

Silver ETFs attracted record inflows in the second half of calendar year 2025 as the sharp rally in silver prices drew millions of new investors to the category. The persistent premium in ETF prices prompted several fund houses to stop accepting fresh inflows into their silver fund of funds (FoFs). 

While mutual funds cannot restrict investments directly into ETFs since they are traded on stock exchanges, they can limit inflows into FoFs, whose investments are routed into the underlying silver ETFs.