By Jigar Trivedi
The Indian government has raised the import tax on gold from 7.5% to 12.5%. The step has been taken in an effort to curb imports, as the rupee slid to a record low. India had imported the most amount of gold in a decade last year, as demand revived after the pandemic. India’s current account deficit at 3 year high level. This is majorly due to oil and gold imports. Crude oil is an essential commodity which we have to keep on buying. Gold is looked at from an investment point of view, not a need but, it can be controlled. Indians consider gold jewellery to be auspicious and a store of value, and the nation relies entirely on bullion imports to meet demand.
While physical demand is seldom a driver of prices, it does provide a floor. There has been a sudden surge in imports of gold. In May, a total of 107 tonnes of gold was imported as compared to 11 tonnes in the same period last year and in June also, the imports have been significant. The surge in gold imports is putting pressure on the current account deficit. India is a net importer due to oil and gold requirements. The same places a pressure on the rupee (hit a record low earlier this week, 6.5% decline YTD), in order to reduce inflows to the world’s second-largest consumer, India increased its import tax on gold in a surprise move today.
USDINR has declined by 6% year to date due to double deficit , capital account due to FII exits and current account due to high import bill. We don’t expect this step to help the rupee significantly. We may see 81 rupee a dollar soon. The tax increase could weaken gold demand and comes as investors in bullion-backed exchange traded funds have been selling their holdings. Unless there is a reversal of ETF flows, the gold price will likely find it difficult to recover.
MCX Gold has gained more than 2.50% at the opening trade but owing to pressure in the international Gold which is trading below $1790/oz, prices may cool down on the MCX too. MCX Gold August may decline to Rs. 51,400 / 10 gram.
(Jigar Trivedi – Research Analyst – Commodities & Currencies Fundamental, Anand Rathi Shares & Stock Brokers. The views expressed are the author’s own)