Domestic gold prices plunged drastically following a sharp cut in import duties in the latest Union budget. Gold prices were hovering above Rs 74,000 per ten grams in the futures market earlier this week but shed to Rs 67,400 later, the lowest level seen since the end of March. A drop in overseas prices further weakened the momentum.
Government has slashed customs duties on gold and silver by 6 percent. The basic customs duty has been reduced to 5 percent from 10 percent, and the Agriculture Infrastructure and Development Cess lowered to 1 percent from 5 percent. This decision will effectively bring down the overall taxes on gold and silver in the country to 9 percent from an earlier 18.5 percent inclusive of GST.
The cut in customs duty is a long-standing demand from the stakeholders. The Government of India has been hiking customs duties on gold for decades to curb its imports which was one of the major reasons for widening the current account deficit. However, cutting duties would lead to lower input costs, cut down on gold smuggling, stimulate domestic manufacturing and boost export competitiveness.
India is the second largest consumer of gold and most of its demand is met by imports. Previously, there was a surge in gold imports through illegal channels resulting in revenue loss for the government. Data shows gold smuggling in India was around 100 tonnes in 2022 and increased to 155 tonnes in 2023 due to a sharp rise in prices. However, the duty cut will reduce the price difference between domestic and overseas gold causing a decline in illegal imports.
Gold prices were skyrocketing in the past few years. The benchmark London spot gold and domestic prices had gained over 50 percent in the last two years. The rise in prices was primarily due to a combination of factors like escalating geopolitical tensions, speculation on US rate cut, higher central bank buying and moderate global growth outlook.The Middle East tensions and the war between Russia and Ukraine bolstered the safe-haven demand for bullion. As a tangible asset that holds intrinsic value, gold often becomes a preferred investment during times of uncertainty, driving its price upwards. A weak global economy drives investors toward gold as a reliable store of value and a hedge against inflation, currency depreciation, and economic uncertainty. So, the expectations of a moderate global growth forecast insisted investors rely on gold.In addition, expectations of US rate cuts, which may cause a decline in the dollar, are keeping the momentum high. However, there are forecasts that the US Federal Reserve will begin the long-awaited interest rate cut in September. In the low interest rate environment, gold-like non-yielding assets tend to shine.
The near-term, the outlook of gold continues to be positive due to reasons like escalating geopolitical tensions, US policy uncertainties, higher central bank buying and downbeat global growth outlook. The reduction in duties could lead to a boost in Indian consumption, which may, in turn, provide additional upward support to prices. Given the favorable demand prospects, long-term investors can use price corrections as buying opportunities to increase their holdings in the metal.
(The author is Head of Commodities, Geojit Financial Services)