India’s gold imports continue to be in focus. After the gold import duty hike, the government has tightened import norms further. It capped duty-free imports at 100 kg. Market participants believe that stricter regulations would help curb arbitrage trading and ease forex pressure. According to Kotak, it is a ‘plumbing fix’ to cut down misuse.
“The move is expected to curb excessive and unregulated gold inflows by imposing a clear quantitative cap, helping authorities manage demand efficiently. It may also ease pressure on foreign exchange reserves, especially amid rising crude oil import costs, “ said Hareesh V, Head of Commodity Research at Geojit Investments.
100 kg cap a plumbing fix- Kotak
“The 100 kg cap is essentially a plumbing fix to address an arbitrage window that the May 13 duty hike has roughly doubled in size,” said Anindya Banerjee, Head of Commodity and Currency Research at Kotak Securities.
On May 14, the government increased import tariffs on gold and silver to 15% from 6%. However, the total tax burden increased to 18.46% from 9.18%, which includes a basic customs duty of 10% plus a 5% agriculture infrastructure and development cess (AIDC), and a 3% IGST charge on the duty-inclusive value.
“Any consignment diverted from the export channel to the domestic market is therefore worth roughly 18% in pure round-tripping margin, versus about 9% before Wednesday — a misuse incentive too rich to leave unchecked,” Banerjee added.
The Directorate General of Foreign Trade (DGFT) has tightened the norms for issuance of Advance Authorisation for gold imports at 100 kilograms per license and said fresh issuance will only be considered after clearance of at least 50% of export obligations.
Measures target arbitrage misuse
Kotak’s Banerjee noted that DGFT’s response is deliberately multi-layered. “The 100 kg ceiling per authorisation caps the volume that any single AA can absorb. The 50% export-obligation gate before a fresh AA is issued forces exporters to actually convert and ship the previous batch before drawing more duty-free metal.”
He explained that the measures taken by the government make the scheme fully usable for genuine jewellery exporters, who will simply roll smaller authorisations more frequently and carry higher compliance overhead. However, the scheme becomes economically unviable for arbitrage seekers, he added.
Additionally, the analyst from Geojit added that this policy measure will encourage domestic gold recycling, which will further help with better resource utilisation.
No Impact on MCX prices- Physical gold being offered at discount
Elaborating on the government’s policy measures, Manav Modi, Commodities Analyst at Motilal Oswal Financial services said the steps have been taken to curb gold demand, and help narrow the ballooning current account deficit.
“Oil is a national emergency now as inventories stand very low levels. The government is now focusing on gold, the second best item in the import basket to control the overall deficit,” he added.
The yellow metal accounts for nearly 9-10% of the country’s import bill, making it a major discretionary forex outflow.
Modi noted that the tightened import norms have no major impact on MCX prices, which align with global cues, However, the move has led to higher discount being offered in the physical gold and silver market. “At some places jewellers are offering gold and silver at a discount of nearly 1 to 2%,” he added.
MCX Gold Futures down 2%
On MCX, Gold Futures for June were quoted at Rs 1,59,127 per gram, down 1.76%.”MCX Gold June futures is likely to drop to Rs. 161,500/10g and Rs. 162,500/10g is a cap for intraday today, “ said Jigar Trivedi, Senior Research Analyst at Indusind Securities.
Stricter norms for gold import authorisations
Under the Advance Authorisation scheme, exporters are permitted to import raw materials, including gold, duty-free for use in the manufacturing of export products. As per the new rules, first-time applicants will have to undergo mandatory physical verification to approve the existence of their production capacity and operational status.
AA holders will be required to submit fortnightly performance reports to regional authorities, detailing gold imported and exported, subject to verification by an independent chartered accountant.
Additionally, the regional authorities of DGFT will submit monthly reports on authorisations issued to the DGFT headquarters. Experts have said these new rules have been brought in to reduce pressure on the currency and help ease the country’s rising import bill amid the prolonged West Asia crisis.
Disclaimer: The views expressed by experts quoted in this article are their own and do not represent the editorial position of this publication. Gold prices and import volumes are subject to market fluctuations and policy changes. This article is for informational purposes only and should not be construed as financial or investment advice. Readers planning gold purchases or investments are strongly advised to consult a qualified financial advisor.