Trump tariffs could force banks to hike gold lease rates for Indian jewellers

Jewellery makers in India may soon have to pay more to lease the yellow metal from banks, as US president Donald Trump's tariff rampage rattles intermediaries in the world bullion market.

Authorized Indian banks importing gold from international banks such as JP Morgan, Citibank, HSBC and Standard Chartered on behalf of local jewellers are set to increase interest rates for so-called gold metal loans (GMLs), bankers and industry executives said.

"Interest rate on GML could be raised to 3-4% from the current 1.5-2% after 20 February, when clarity emerges on the tariff treatment of gold imports into the US," said Shekhar Bhandari, president and business head of Kotak Mahindra Bank, one of the 14 lenders authorized by the Reserve Bank of India to import gold and silver.

Also read |  FPI returns since 4 June all but wiped out

International bullion banks are shifting gold vaults to the US in anticipation of sweeping tariff hikes by the Trump administration, industry executives said. Uncertainty over the tariff burden has tightened gold supply and increased logistics costs, which foreign banks are passing on to customers through higher lease rates by banks here. This, in turn, is being passed on to jewellers in the form of higher interest rates.

Interest rates on gold metal loans could be hiked depending on the bank to as much as 5-6% from 2.5-3% in "certain cases," another official from the bullion desk at a private bank confirmed.

The rise in loan rate was confirmed by Saurabh Gadgil, chairman & managing director at PNG Jewellers, a listed firm. "Lease rates could rise from 1.5-2% to 3-4% and even 5% depending on the lender," Gadgil said. "Clarity should emerge next month on whether Trump signs an executive order clamping a higher tax on gold imports."

Cost to the jeweller

He said this would be a cost to the jeweller, which cannot be passed on to the consumer. "It's more about cash flow management and hedging; so there can't be any pass through the end consumer."

Amit Modak, CEO of PNG Sons, attributed the potential hike in interest rates to the tight supply from international bullion banks, who have transferred the metal from vaults across the world to the US. "This has created supply tightness and could lead to an increase in the lease rates by domestic banks who import from international suppliers on consignment basis ," Modak said.

RBI has authorized 14 lenders to import gold and silver in FY25, including Kotak Mahindra Bank, ICICI Bank, HDFC Bank, State Bank of India and Yes Bank. These banks import the metal on a consignment basis and sell it outright or lease it to domestic jewellers or exporters.

Also read |  Record FII exodus shakes India’s stock markets even as domestic funds step up

For outright sales, banks charge a premium to a customer, and when leasing, charge an interest rate payable in equivalent rupees. The GML has a 180-day tenure for a domestic jewellery manufacturer and a 270-day tenure for an exporter. Loans can be flexible, with a floating interest rate, or fixed, with a predetermined repayment date.

Instead of taking on inventory risk by purchasing the gold outright, jewellers like PNG Jewellers and Kalyan Jewellers take a GML and repay the loan or a portion of it once they price it or sell the gold to a customer. The loans can be rolled over.

If they buy outright and the price rises, they sit on an inventory gain, but if it falls, they suffer an inventory loss.

"Gold metal loan is an effective way of hedging the price risk of the metal as the gold (take on loan) is priced only once a sale happens," said Bhargav Vaidya, a consultant to leading gold jewellers.

Also read |  RBI to continue interventions in forex market, despite tight liquidity