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To curb imports of gold in India, the Finance Ministry on Friday increased custom duty on yellow metal by 5%. The hike in gold import duty was needed as there has been a significant jump in imports which is putting pressure on the current account deficit. Gold prices have reacted by rising to more than ₹52,000 on MCX. Considering the recent macroeconomic risks and with the new levies on gold, the yellow metal prices are set to get costlier in India ahead.
FinMin increased gold import duty to 12.5% from 7.5% - resulting in a hike of 5%. However, the total levies on gold are likely to be around 18.45%.
Sugandha Sachdeva, VP- Commodity & Currency Research, Religare Broking explains that in an attempt to stem the steep decline in the rupee and curb the widening trade deficit, which has soared to record highs of $23.33 bln in May amid rising import bills, the government has raised the import duty on gold by 5% in a surprise move, which makes the import duty on gold as 12.50%, while the effective duty on gold will be 15%, including the 2.5% Agri Cess, as social welfare surcharge of 0.75% has been exempted. In all, the net duty change will be 4.25%. Gold also attracts an additional 3% GST as well, which means the total levies on gold will be 18.45%.
According to Naveen Mathur, Director Commodities and Currencies, Anand Rathi Shares, and Stock Brokers, the Indian government has raised the import tax on gold from 7.5% to 12.5%. The step has been taken in an effort to curb imports, as the rupee slid to a record low. India imported the most amount of gold in a decade last year, as demand revived after the pandemic. There has been a sudden surge in imports of gold.
In May, gold imports stood at 107 tonnes of gold compared to 11 tonnes same period last year and in June also the imports have been significant.
The surge in gold imports is putting pressure on the current account deficit.
"India is a net importer due to oil and gold requirements. The same places a pressure on the rupee (hit a record low earlier this week, 6.5% decline YTD), in order to reduce inflows to the world’s second-largest consumer, India increased its import tax on gold in a surprise move today," Mathur said.
At the interbank forex market, the rupee today touched a new all-time low against the dollar index, however, slightly recovered during the closing hours. The local currency closed at 78.94 per dollar higher by 12 paise. The rupee opened at 78.99 but touched a fresh all-time low of 79.12 against the greenback before correcting.
On today's rupee performance, Vinod Nair, Head of Research at Geojit Financial Service said, "Unfavorable cues from the domestic market led to a weak start due to weakness in the rupee and selling in oil refineries as the government imposed an additional export duty on petrol and diesel. Adding to the weakness, India’s factory output growth slowed down during June, as high inflation continued to dampen demand."
On MCX, gold futures maturing on August 5, 2022, jumped by 2.35% or ₹1,188 currently to ₹51,705. However, the futures have climbed to the day's high of ₹52,032. Overall, the jump in gold futures was around 2.5% for the day.
Mathur said, "MCX Gold has gained more than 2.50% at the opening trade but owing to pressure in the international Gold which is trading below $1800/oz, prices may cool down on the MCX too." He added that MCX Gold August may decline to ₹51,400 per 10 gram.
In India, 24 carat gold in 10 gram is priced at ₹52,200 today higher by ₹1,310 from the previous day. Meanwhile, the 22 carat gold in 10 gram jumped by ₹1,200 to ₹47,850 from the previous day, as per the Good Returns.
Gold prices will see a rise following the increase in levies. Prices of domestic gold are likely to see a jump of ₹2,000 per 10 gram.
Sachdeva said, "Considering the fact that we largely import gold to meet domestic demand, this is likely to lead to a proportionate rise in the price of domestic gold by around ₹2000 per 10gm, factoring in international gold prices which are trading with a slightly negative bias. With domestic prices surging, demand is likely to take a hit at a time when the country is already grappling with high inflation."
She further said that India's total imports jumped by around 56% in May (YoY) amid surging costs of energy products, whereas gold imports which is a non-essential commodity rose by 677% from a year ago to $5.83 billion, the highest level in a year. Gold demand has seen a strong pick up amid a decline in prices, where they are seen consolidating around ₹50000/10gm mark.
On the economic front, Sachdeva said, besides, crude prices which have risen by around 50% this year amid the supply squeeze caused by the Russia-Ukraine war are already widening the CAD and putting pressure on the Indian rupee which has slumped to record lows of 79.13 mark. As per the estimates, India's current account deficit is expected to widen to 2.9% of GDP for the current fiscal, as compared to 1.2% in FY 22.