An unexpected move by India’s central bank to ease curbs on overseas purchases instead of tightening them indicates the government is more relaxed about the trade deficit, though trade sources said it does not mean there will be a jump in imports.
The world’s second-biggest bullion buyer scrapped a rule on Friday mandating traders to export 20 percent of all gold imported into the country after weeks of speculation that it would tighten the rule.
Struggling with a high trade deficit, India last year imposed a record 10 percent import duty on gold and the so-called 80-20 rule to limit purchases. Bullion is the second-biggest item on India’s import bill after oil.
However, lower oil prices may mean the government is more comfortable about the trade deficit and softening restrictions on gold, analysts said. Oil prices are at five-year lows.
“At the moment clearly the government’s working assumption seems to be that lower crude oil and softer gold prices should keep the current account deficit in acceptable limits, even with some increase in the volume of gold imports,” ANZ analysts said in a note.
Prime Minister Narendra Modi also indicated in his election campaign that he wasn’t in favour of hurting the jewellery industry through controls on gold imports, they said.
Bullion dealers in India had stocked up in recent weeks, expecting further tightening of the 80-20 rule, which was put in place last year to control an influx of gold.
“There is still a lot of confusion. A lot of that has to do with the fact it has been such a repressive environment over the last year that people second guess everything,” said Sunil Kashyap, managing director at bullion bank ScotiaMocatta in Hong Kong.
“I think the immediate reaction will be that imports will stop for the time being. Imports in the first couple of weeks may be curtailed because of discounts and stock liquidation,” he said, adding that the market was currently oversupplied.
Indian prices fell to a small discount on Friday after the central bank announcement, compared to a premium of $10 earlier in the week, traders said. They recovered later to a small premium.
“There will not be a surge in imports,” said Bachhraj Bamalwa, director at the All India Gems and Jewellery Trade Federation.
“Stockpiles from imports in the last two months foreseeing further restrictions are still lying with bullion dealers and at customs,” he said, adding that the inventory should be enough to meet demand in December.
A trader in Mumbai said he would wait for local premiums to spike before importing in big quantities as that would guarantee better incentives.
Despite weaker imports, consumer demand could remain strong, according to retailers.
“Expectations that gold prices may further drop from the current prices, may attract more buying for the ongoing wedding season,” said Rahul Gupta, director of P.P. Jewellers in New Delhi.
Gold was trading close to a 4-1/2-year low on Monday.