Nearly three weeks after the Centre raised customs duty on gold to 15 percent from 6 percent on May 13, domestic gold prices have continued to broadly mirror international trends, with geopolitical tensions in the Middle East driving the bullion rally.
Industry experts say only part of the increase has so far been reflected in local prices as weak demand, inventory liquidation and rising recycled supply have cushioned the impact.
Gold prices have remained elevated globally amid heightened uncertainty following the escalation of the conflict in Iran. As India imports the bulk of its gold requirements, domestic prices continue to take cues from international benchmarks such as COMEX and London spot gold.
“Domestic gold continues to track international benchmarks directionally. COMEX and LBMA still determine the underlying trend, but the steepest-ever duty increase has not yet been fully reflected in local prices,” an industry expert said.
According to her, against an international spot price of around $4,713 per ounce when the duty hike was announced, MCX spot gold has risen only about 4-6 percent, lower than the 9-percentage-point jump on customs duty.
The government raised the import duty on gold to 15 percent from 6 percent amid a weakening rupee, elevated crude oil prices and geopolitical tensions, while also imposing stricter import regulations.
Pass-through to consumers
According to her, only a fraction of the duty hike has been passed on to consumers so far. Instead, domestic prices now trade at a steep discount to the official landed price, which has widened sharply from an average of around $14 per ounce before the duty increase to nearly $150 per ounce after the hike.
“This suggests that while domestic prices are still following global movements, the local market is pricing gold below duty-inclusive landed costs because of weak demand and higher recycled supply,” she said.
The analyst says several factors have prevented the duty hike from being fully passed on to consumers. The increase coincided with a seasonally weak period for jewellery demand after the peak wedding season, while the traditional inauspicious period between mid-May and mid-June further weighed on purchases.
The sharp rise in prices also encouraged investors to book profits and prompted dealers to release inventories imported at lower duty rates.
Demand data reflects the slowdown. According to industry estimates cited by the Indian Bullion and Jewellers Association (IBJA), fortnightly gold demand has dropped to roughly 7.5 tonnes, down from around 25 tonnes during the same period last year. Earlier, it was estimated that the jewellery business could decline by 5–7 percent, while overall demand may fall by nearly 10 percent.
Weak demand
Another industry expert said that customs duty is only one of the factors influencing domestic gold prices.
“The increase in customs duty raises the landed cost of imported gold and generally creates a premium over international prices. However, Indian gold prices do not move solely due to changes in duty. They continue to closely track global benchmarks because India imports most of its gold requirements,” he said.
Apart from international gold prices, domestic bullion rates are influenced by the rupee-dollar exchange rate and local taxes. A stronger rupee can partially offset the impact of higher import duties, while a weaker rupee amplifies the impact of higher duties and global gold prices.
He added that weakening jewellery demand, lower inventory accumulation by jewellers and increased recycling activity have also moderated the impact of the duty increase on retail prices.
Experts believe that for now, domestic gold will continue to be driven by global developments, particularly geopolitical risks, expectations around US interest rates, and movements in the dollar.
