Higher import duties on gold: spot market demand may not be affected in the long term, analysts say

Demand for gold in the country’s major spot markets may not see a significant decline in the medium to long term despite the sharp rise in import duties for the precious metal, market experts said. India’s buying of the yellow metal is mostly driven by sentiment rather than price and that might not be affected so easily, they said.

Friday, the the government has raised import duties on gold to 15 percent from 10.75 percent to control the current account deficit and rising gold metal imports. The price changes came into effect on June 30. Previously, the basic customs duty on gold was 7.5%, it will now be 12.5%. In addition to the Agricultural Infrastructure Development Tax (AIDC) of 2.5%, the effective customs duty on gold will be 15%.

“In India, we buy gold on an emotional basis… If someone has a marriage in the family, I don’t think that would have a major impact on the purchase,” said Ajay Kedia, director General of Kedia Advisory at indianexpress.com.

India is the second largest consumer of gold and meets most of its demand through imports. The government’s latest decision raises some important questions regarding market prices and demand for the precious metal.

Kedia believes the increased import duties will cause a momentary drop in demand for the precious metal, but unlike buyers in the international market, Indians buy gold for emotional reasons. “So there may be a drop in demand at the moment, customers will continue to buy gold for the foreseeable future,” he said.

However, he also believes that this rise may weigh on investor demand in the country, as each time someone invests in gold, their goal is to receive at least an 8-10% gain. “With the increase in import duties, the return will be jeopardized,” he said.

So, where investment demand may be affected, the physical demand for the asset will not support anything too great.

Speaking about the affordability of the yellow metal, considering the past few months when inflation has peaked high in the country, Kedia said, “Higher inflation has led to lower purchasing power of the people, But jewelry shopping during wedding season is not planned in days, such expensive purchases are planned decades in advance.

He explained that gold and silver expenses are already fixed in such cases.

The government’s priority at this stage is to combat high inflation and rising import bills. India’s three main imports are crude oil, gold and edible oil and since gold is the only non-productive import, the government has chosen to increase it. However, over the long term, analysts expect gold to return to charm once inflation and recession fears subside.

India Bullion and Jewelers Association (IBJA) National Secretary Surendra Mehta said that initially for the first three months demand will be affected but there is some need for gold in our country.

Speaking to indianexpress.com, Mehta said: “Gold is used by rural people to save money as a transport mechanism, it is used as a hedge against inflation, as an alternative investment when other asset classes are in recession.”

“For the first two or three months, the demand for gold will take a hit. However, overall, I don’t see any change in the demand pattern,” he added.

Asked about the impact on demand for the upcoming wedding season, which is in full swing right now, Mehta said, “The auspicious days for weddings end on July 10, so shopping for the wedding season is already finished. The next favorable season does not start until August-September, so this period will be a period of low demand anyway.

Gold prices rose sharply following the government’s announcement of increased imports, hence gold rates closed higher in the country’s major spot markets on Friday.

999 purity gold closed at Rs 51,791 for 10 grams, up Rs 928 from Thursday’s closing price of Rs 50,863, while 916 purity gold closed at Rs 47,441 for 10 grams. grams, up Rs 850 from the previous day’s closing price of Rs. 46,591.

Ingots Purity Today’s close (Rs) Previous close (Rs)
Gold 999 51,791 50,863
995 51,584 50,659
916 47,441 46,591
750 38,843 38 147
585 30,298 29,755
Source: Indian Bullion and Jewelers Association (IBJA)

On the Multi Commodity Exchange of India, the gold contract for August delivery was trading at Rs 51,601.00 per 10 grams, up Rs 1084.00 (2.15%) at 6:29 p.m.

Talking about the impact of import duties, Nirpendra Yadav, Senior Commodity Research Analyst at Swastika Investmart, agreed with other market experts and said “with news of an increase 5% import duties in India, gold on MCX could find support towards the Rs 49,500 levels and resistance towards Rs 52,500 for the August contract.

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