As Gold Prices Hit New Low, Indian Import Duties Hike Supply Concerns

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The festival season is upon us in India and as expected, the demand for gold has registered a surge. But extremely low levels of imports of the yellow metal this and during previous quarters may mean a huge gap between demand and supply, according to traders.

A few days ago, India’s most important bank, the Reserve Bank of India (RBI), had tightened norms for companies lending against gold. Then, in a fresh salvo, late last month, the Indian government had hiked the import duty on gold jewelry to 15 percent from the 10 percent earlier, the third such hike in recent times, to check the inward shipment of gold, and to protect domestic manufacturers. MetalMiner had reported on the previous import duty hikes.

The RBI’s communique made things amply clear. “In order to standardize the valuation and make it more transparent to the borrower, it has been decided that gold jewelry accepted as collateral will have to be valued at the average of the closing price of 22 carat gold for the preceding 30 days, as quoted by the Bombay Bullion Association.”

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Prior to this, there was no standard method for arriving at the value of gold accepted as collateral and valuation is arbitrary and opaque. The RBI also tightened the regulations governing non-banking finance companies (NBFCs) lending against gold jewelry.

But more than anything, it is the hike in import duty, yet again, that has got everyone’s goat.

The constant increases of the import duty have led to an increase in the illegal influx of gold from other countries, raising concerns.

Organizations like the local chapter of the World Gold Council (WGC) have also expressed apprehension on these developments. The Times of India reported that the Director for Jewelry of the WGC, Vipin Sharma, had urged the government to take a long-term and holistic view to ensure gold did not lose its luster in the Indian market.

Sharma said there was a need to balance consumer demand and the country’s economic reality. He said recent government schemes like the option of monetizing personal gold reserves to help tackle the issue of the country’s current account deficit were good, but considering that gold was still the preferred form of investment for many Indian families, there was a need for another look at the policies, because the present scheme of things was encouraging its entry into India via unofficial channels.

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In fact, countries like Dubai, one of the highest exporters of gold to India, have started feeling the brunt of the Indian government’s repeated duty hikes. Exports to India by members of Dubai Chamber of Commerce and Industry fell 18 percent in the first eight months this year, as per this news report in The National.

The demand for gold within India is high, and is expected to remain so even in the last quarter of the year. The requirement is likely to be somewhere in the region of 250-300 tons.

Already, in the first two quarters, 567 tons of gold was traded, but what is of mighty concern now is that with such low imports, the market may not be able to cater to the demands in the festive season, which lasts up until the end of the year.

FREE Download: The Monthly MMI® Report – covering the Precious markets.

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