Even as the gold market is looking for a clear direction for the months ahead, the outlook is becoming complex. Over the next few days, two significant events can have a major impact.

The most significant of these is the mid-June FOMC meeting in the US. It appears increasingly likely that as part of policy normalisation, the Fed will hike the rate by 25 bp. Most macro-data, including employment, are in positive territory. Relatively weak crude oil prices have contained inflation. A rate hike in the US will send gold prices hurtling down as it would boost the dollar as well as the equities market.

But is the gold market ready for a surprise? If the Fed decides to hold the rate, it would be hugely bullish for gold.

Another event closer home is the decision on the GST rate on gold. It has become contentious with stakeholders expressing divergent views on the GST rate. Currently, gold attracts a 10 per cent ad valorem customs duty on import, 1 per cent VAT (value-added tax) and 1 percent excise duty (on jewellery), for a total tax burden of 12 per cent.

Given the five-slab GST rates, it would be logical to fix the GST rate at 5 per cent, the lowest positive rate, notwithstanding the fact that it would take the total tax on gold, including jewellery, to 15 per cent (10 per cent customs duty plus 5 per cent GST).

The concerns of the bullion trade and of jewellery makers that a higher rate than at present may curb demand are misplaced and self-serving. A higher tax by itself is unlikely to curb demand as experience shows. Despite successive hikes in customs duty, gold prices have steadily risen to ₹33,000 per 10 grams due to global factors, with little or no demand destruction.

Indeed, fixing GST at 5 per cent would result in increased revenue earnings for the exchequer. While 5 per cent GST will remain fixed, the customs duty provides leeway for the policymakers to cushion the impact, if any, of the higher total duty. At an appropriate time and when circumstances demand, the rate of import duty can be reduced. Indeed, the recent strengthening of the rupee is itself an ‘indirect’ reduction in the import duty on gold; and in the coming months and years, both fundamentals and the technical picture suggest that the rupee may gain further strength.

Although widely in demand and consumed by all sections of the population, gold is decidedly a luxury commodity or a ‘strong demerit good’, and is being heavily subsidised with substantially lower taxes in relation to other goods, according to the Economic Survey 2015-16.

If GST on gold in India is fixed at 5 percent, it would be hugely bearish for world gold prices, which in turn should prove positive for an importing country such as ours. as it would neutralise the impact of a higher tax burden. Again, by mid-June, if the US Fed decides to hike the interest rate, there could a further blow to gold prices, again benefiting Indian consumers.

The writer is a commodities and agribusiness specialist. Views are personal