In October 2025, the silver market told a story of misplaced momentum. For weeks, India’s silver ETFs — led by Kotak’s — absorbed torrents of investor money, turning a financial surge into a physical scramble. Prices of ETF units on the exchange sprinted ahead of their underlying value, widening premiums to 10–12% over NAVs. By the time spot silver prices caught up, they had raced from ₹1.24 lakh per kg in early September to about ₹1.65 lakh by mid-October — a 32% surge in a month. But the rise wasn’t born of industrial scarcity alone. It was a classic chain reaction — financial demand transmuted into physical stress. Each rupee that poured into an ETF became an obligation to buy physical silver immediately. In a shallow logistics chain, that was like trying to pour a river through a straw.
The math explains the strain. Suppose ₹10,000 crore rushed into Indian silver ETFs over a few weeks. With silver near ₹1.6 lakh/kg, that meant roughly 620 tonnes of fresh physical demand. Yet India imports only about 6,000–7,000 tonnes annually — meaning one month’s ETF inflow alone equalled a tenth of annual imports. Warehouses thinned out, importers stretched, and authorized participants found themselves paying ₹20,000/kg more in the spot market than the futures price on MCX.
The arbitrage machine that should have cooled prices broke. Normally, when ETF prices run ahead, authorized participants buy cheaper silver — physical or futures — and deliver it to the fund in exchange for ETF units. That arbitrage keeps the ETF tethered to spot. But this time, physical silver simply wasn’t there. Traders could see a ₹24,000/kg profit gap between spot and futures, but feared the very thing that arbitrage needs most — deliverability.
Ironically, the derivatives market was the only corner that stayed calm. MCX futures didn’t mirror the frenzy. The December contract hovered near ₹1.46 lakh even as cash trades in some cities crossed ₹1.70 lakh. In market language, that’s steep backwardation; in human language, it’s a sign the futures market didn’t buy into the panic. It was signalling that the squeeze was temporary — that supply would normalize.
That divergence between financial perception (ETFs) and financial discipline (futures) is the heart of the story. ETFs reflected fear of missing out; futures reflected expectation of reversion. One amplified volatility, the other contained it.
The Missed Bridge
Regulations did, in fact, offer ETF managers a way out. Under SEBI’s framework, a silver ETF must invest at least 95% in physical silver and related instruments. It can, however, exceed the usual 10% cap on derivatives if it intends to take delivery. That rule exists precisely for stress periods like this — to let managers use near-month futures as temporary holding metal.
Here’s how it could have worked numerically. When the spot was ₹1.65 lakh and December MCX futures hovered near ₹1.46 lakh, ETFs could have met inflows by buying those cheaper futures. At expiry, taking delivery would convert them into bars at a 12% discount to spot. If even half of the new inflows — say ₹5,000 crore — had been routed through this bridge, it could have redirected 300 tonnes of silver demand away from immediate imports, cooling the spot squeeze and narrowing ETF premiums. ETF NAVs would have aligned with futures-implied prices, trimming retail entry costs and preventing contagion into spot.
In effect, financial inflows would have been absorbed by financial instruments first, rather than spilling into physical markets immediately. That single design choice — routing creation through deliverable futures — could have shaved 6–8 percentage points off the domestic premium and reduced ETF price volatility.
Containing Contagion
There’s a regulatory sweet spot here. Futures are not a speculative loophole; they’re a liquidity bridge. SEBI already allows 100% futures exposure if delivery is intended. The gap lies in execution: ETFs and their authorized participants need clear operational templates — pre-approved policies, vault coordination, and risk thresholds — to use this clause dynamically. The goal isn’t leverage; it’s elasticity.
Had ETF managers pivoted quickly, the contagion chain — ETF premium → spot surge → import scramble — could have been stopped early. By mid-October, five fund houses halted new inflows to stop retail investors from buying at inflated prices. That move cooled sentiment, but it was a blunt approach. A more precise method would have been to keep creations open, but price them through a variable creation fee that reflects actual import and carry costs, and meet metal needs partially through deliverable futures.
Such a dual mechanism — futures bridge plus adaptive pricing — would make the ETF market a pressure valve, not the amplifier. When premiums widen beyond, say, 3%, ETF creation can shift automatically toward futures-backed positions until the physical gap closes. The rulebook allows; it just needs activation.
Three-Part Strategy for Stability
1) Use Deliverable Futures as a Structural Buffer: Maintain an always-on policy to source up to 30–40% of incremental creation from near-month Silver contracts when spot premiums exceed 3–4%. This anchors ETF NAVs to a more stable reference.
2) Dynamic Creation Fees and Swing Pricing: Build a premium pass-through into ETF creation costs so that short-term speculators bear the scarcity price. If import or vault costs push physical silver 10% above global parity, that charge should be reflected in the ETF’s creation fee, deterring hot inflows and protecting long-term investors.
3) Expand Authorized Participant Capacity: Encourage deeper AP books with access to both derivative margins and physical delivery facilities. When APs can arbitrage across all three layers — futures, spot, and ETF — the system self-corrects faster, keeping price gaps short-lived.
Together, these levers create a circuit that redistributes pressure rather than letting it rupture in one corner of the market.
The Physics of Silver
Silver’s October squeeze wasn’t about greed or panic; it was about mismatched velocities. Financial capital moved faster than physical metal could. ETFs amplified the rush, spot markets absorbed the shock, and derivatives — ironically the most maligned part of finance — kept its composure.
The way forward isn’t to slow down finance but to synchronize it. Let money first encounter financial metal — deliverable futures — before it hits physical scarcity. That will make ETFs more liquid, spot markets more stable, and investors less vulnerable to temporary dislocations.
Because in the end, markets, like physics, obey gravity. Momentum can stretch the curve, but mass — real metal — decides the resting point. The challenge for India’s silver ecosystem is to develop tools that realign mass and momentum before the system overheats. When that happens, supply arrives, ETFs settle, arbitrage closes, and gravity reasserts itself.
(V Shunmugam is Partner, MCQube.)
Views are personal, and do not represent the stand of this publication.
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