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A jump in import duties on gold by 5% is likely to impact consumer demand, said analysts and companies.

On Friday, the Finance Ministry increased custom duty on the yellow metal to 12.5% from 7.5% resulting in a hike of 5%. This was done in a bid to curb imports of gold in India.

To be sure, India is largely dependent on imports to meet its domestic demand.

“Indian government has decided to raise the basic customs duty on gold from 7.5% to 12.5% while social welfare surcharge has been exempted. The total new import duty applicable will be 15%. Since India is largely dependent on imports to meet its domestic demand, higher import duty may make gold expensive," said analysts at Kotak Securities.

The move may help government reduce imports and ease pressure on trade balance as well as boost revenues from customs duty, they argued. “However, higher domestic price and slower economic growth may hamper gold demand in India which may weigh on international prices already struggling for some support," said

Meanwhile, retailers said demand for the yellow metal has been muted but is expected to pick up closer to the festive season.

“The gold price currently at Rs53,000 level is already off from the high of around Rs57,000 seen earlier. Hence, we believe the increase in import duty is not likely to impact consumer demand much as the rise in prices will be offset by the already lower market price. While the current consumer demand has been moderate compared to last quarter due to inflationary pressures, but we are hopeful of it bouncing back before the festive season," said Suvankar Sen, MD & CEO, Senco Gold & Diamonds.

Suvankar added that most of the gold used as raw material by the jeweller is sourced by way of gold metal loan facilities offered by bullion banks.

“We follow a procurement policy aimed at de-risking the business from gold price fluctuations by sourcing gold under the gold loan facilities offered by banks, including entering into appropriate hedging policies," he said.

Price of domestic yellow metal could climb up by Rs2,000 per 10 grams, said Sugandha Sachdeva, VP, Commodity and Currency Research and Religare Broking.

“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 said.

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