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To check the fall in the rupee's value against the US dollar, the Indian government today raised the import duty on gold, triggering a sharp jump in domestic prices of the yellow metal.  The import duty was hiked to 12.5% from 7.5%, reversing a cut last year. On MCX, futures jumped 3% to touch 52,000 levels despite subdued global rates. India imports most of its gold requirement and domestic prices closely track the rupee dollar exchange rate and global rates. A 3% GST is also imposed on gold.

The overall import charges on gold go up to 16.25%, from 10.75%, after including cess and surcharges, say analysts. 

"In an attempt to stem the steep decline in rupee and curb the widening trade deficit, the government has raised the import duty on gold by 5% in a surprise move. Gold also attracts additional 3% GST as well," said Sugandha Sachdeva, VP- Commodity & Currency Research, Religare Broking Ltd on imports duty hike.

The sudden surge in domestic prices however could dampen demand of gold in India. 

“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 Rs.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. 

The rupee today slid to a record low of 79.11 against the US dollar and is down over 6% so far this year against the greenback. 

NS Ramaswamy, Head of Commodities, Ventura Securities Ltd, said: “It’s now costly to purchase imported gold. The government action was primarily to reduce imported gold consumption. As a result of this announcement the opening market saw an immediate spike. When the customs duty was @7.50% the overall import charges was @10.75% {agri/Infra Cess (2.50%)and Social Welfare Surcharge (0.75%)} ; Now the same works out to @16.25%; Thus a load increase of @5.50%. Apart from this the present 3% GST is also applicable which makes the imported gold price unviable, especially when there is a lackluster demand."

He expects the spike in domestic gold prices to cool off. “We don't see the gold price to spike any further to this news other than increase of Re.1 lakh per 1 kg of gold."  Or in other words, 1,000 per 10 gram. 

Naveen Mathur, Director Commodities and Currencies, Anand Rathi Shares and Stock Brokers, says that MCX gold prices may cool off also due to pressure in international gold prices. 

“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. MCX Gold August may decline to Rs. 51,400/10 gram," he said. 

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