The Centre’s attempt to reduce import bills by hiking the import duty on gold by a sharp 5 per cent, may not affect demand for the precious metal significantly according to market experts.
Written by Kritika Singh
The demand for gold in the key spot markets of the country may not see a significant drop in the mid-to-long term despite the sharp hike in the import duty of the precious metal, market experts said.
Expert say the purchase of the yellow metal in India is predominantly driven by sentiment instead of price and this may not get affected so easily.
“In India, we buy gold on emotional basis…If someone has a wedding in the family, I don’t think it would have a major impact on the purchase,” Ajay Kedia, Managing Director at Kedia Advisory told indianexpress.com.
India is the second-largest consumer of gold and fulfills most of its demand through imports. On Friday, the government hiked import duty on gold to 15 per cent from 10.75 per cent to check the current account deficit and rising import of the yellow metal. The duty changes came into effect on June 30. Earlier, the basic customs duty on gold was 7.5 per cent, it will now be 12.5 per cent. Along with the agriculture infrastructure development cess (AIDC) of 2.5 per cent, the effective gold customs duty will be 15 per cent.
The latest move by the government raises a few questions regarding the price and demand for the precious metal in the market.
Kedia believes that the increase in the import duty will cause a momentary dent in the demand for the precious metal, but unlike buyers in the international market, Indians buy gold on emotional grounds. “So there can be a dent in the demand for now, customers will continue to purchase gold in the near future,” he said.
However, he also believes that this hike can take a toll on the demand by the investors in the country, as whenever someone invests in gold their objective is to receive at least an 8 to 10 per cent gain. “With the rise in import duty, the return will be compromised,” Kedia said.
So where investment demand can take a hit, the physical demand for the asset will endure nothing too major.
Speaking about the affordability of gold, considering inflation in the past few months has reached a record high, Kedia said, “Higher inflation has led to a drop in the purchasing power of the people, but jewellery purchases in wedding seasons aren’t planned in a matter of days, such expensive purchases are planned for decades in advance.”
He explained that the expenditure towards gold and silver is already fixed in such cases.
The government’s priority at this point is to combat high inflation and rising import bills. The top three imports for India are crude oil, gold, and edible oil, and since gold is the only non-productive import, government has chosen to raise it. However, in the long run, analysts expect gold will charm customers again once inflation and recession concerns ease.
Surendra Mehta, National Secretary, India Bullion and Jewellers Association (IBJA), said gold demand would take a hit for the first two-three months but there won’t be any impact in the long run.
Speaking to indianexpress.com, Mehta said, “Gold is used by the rural population to save money as a faring mechanism, it is used as a hedge against inflation, as an alternative investment when the other asset classes are in a recession.”
“For the initial two-three months, gold demand will take a hit. However, overall I do not see any changes in the demand pattern,” he added.
On being asked about the impact on demand for the upcoming wedding season, Mehta said, “Auspicious days for marriages end on July 10, so purchases for the wedding season have already concluded. The next auspicious season doesn’t start until August-September, so this period is going to be a low demand period anyway.”
Gold prices rose sharply following the announcement of the import hike by the government.
Gold of 999 purity closed at Rs 51,791 per 10 grams on Friday, an increase of Rs 928 from Thursday’s closing price of Rs 50,863, while gold of 916 purity closed at Rs 47,441 per 10 grams, up Rs 850 from the previous day’s closing price of Rs 46,591.
| Bullion | 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: India Bullion and Jewellers 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 per cent) at 06:29 PM.
Talking about the import duty impact, Nirpendra Yadav, Senior Commodity Research Analyst, Swastika Investmart, agreed with other market experts and said, “With the news of an increase in the import duty of 5 per cent in India, the Gold on MCX may find support towards the levels of Rs 49,500 and resistance towards Rs 52,500 for the August contract.”
Source:indianexpress.com