The recent increase in customs duty on gold imports to 15 per cent could push up domestic gold prices, alter physical market dynamics and have implications for India’s current account deficit (CAD), according to a report by SBI Research.
The report said the import duty increase is likely to have a ripple effect across the bullion market, including a possible diversion of supplies through unofficial channels.
“The decision to increase duty on gold imports has been taken on numerous occasions in the past. However, imposition of duty has its consequences in diverting the physical supply to grey channels,” the report said.
According to the report, the widening gap between international and domestic gold prices after a duty increase creates opportunities for arbitrage.
“This is driven by higher spread between the offshore and onshore price of gold, which creates opportunity for arbitrage,” it added.
SBI Research noted that the duty on gold had earlier been reduced sharply. “Also, it should be kept in mind that duty on gold was reduced by more than half to 6% in June 2024 till the current rise to 15%,” the report stated.
The report further said that higher import duties have historically led to a rise in seizures by enforcement agencies. On the external sector, SBI Research highlighted that gold imports continue to remain a matter of concern for the current account deficit.
“The impact of gold on the Current Account Deficit (CAD) is a matter of concern,” the report said. However, the report clarified that gold imports alone have not been the sole driver of CAD trends over the years. There is no clear trend that CAD developments have been driven by gold, it said, while adding that projections based on recent trends show a significant impact of gold imports on CAD.
The report also pointed out that while gold import volumes have been declining, the overall import bill has risen sharply due to higher prices. The trends in value show a sharp rise from USD 57.9 billion in FY25 to USD 72.4 billion in FY26. At the same time, in volume terms, the gold imports have shown a decreasing trend since FY24, reducing by approximately 5 per cent in FY25 and FY26.
Looking ahead, SBI Research expects some moderation in import volumes following the latest duty hike. “We expect that current hike in duty may see similar trends as seen in past. However, we also feel that given the strong negative volume effect seen in recent two years, there will be some downward adjustment in volumes, the extent of which is however uncertain,” the report added.
The high import duty on gold will bring down volume demand for the precious metal by 10-15% and push out old gold into the market as Indian households will leverage the high price, helping address the country’s current account deficit. It is estimated that around 25,000 tonnes of idle gold is locked up in Indian households.
“We are expecting a lot of old gold to enter the market. Volume sales of gold will come down because of the high price,” said chairman of Bhima Jewellers.
“Smuggling of gold is expected to rise and more people will take gold loan against jewellery to offset inflation,” said chairman of India Bullion & Jewellers Association, Earlier, during the higher duty regime, nearly 100-120 tonnes of gold used to enter the country through the grey route, he added.
India already holds an enormous quantum of gold in their households, much of it being idle. If even a fraction of that is brought back into the circulation through formal exchange and recycling, pressure on fresh import eases
Industry executives said promoting sales of lower carat jewellery like 14K and 9K can reduce imports by 20-30%, and discouraging investments in gold bars and coins can reduce imports by another 20% -30%. India annually imports 750-800 tonnes of gold to meet its demand. Revamping the Gold Monetisation Scheme can also help the government to tap 25,000 tonnes of grandfather stock.
Chairman of Jos Alukkas, which has presence in five southern states, said, “Following this duty hike, there will be a rush among customers to sell old gold jewellery for cash.”
Incidentally, nearly 50 per cent of sales of big jewellery retailers are now through old gold exchanges.
Source from: https://retail.economictimes.indiatimes.com/news/apparel-fashion/jewellery/brace-for-higher-gold-prices-and-supply-boom-in-grey-markets-after-customs-duty-hike-sbi-report/131083962
