Shimmering Gold

 

Shimmering Gold 

After China, India is the second-biggest gold consumer in the world. However, India fulfills most of its gold demand through imports, and it is largely driven by the jewelry industry. India imported the highest quantity of gold in the last 10 years in 2021. The imports of gold in May 2022 jumped by almost nine times to $7.7 billion compared to a year ago.

However, the year 2022 has brought uncertainty to market players who are trying to assess the implication of higher interest rates on economic growth, in the backdrop of the Russia-Ukraine fight and the China- Taiwan conflict taking shape for war.

The gold price had a disappointing performance so far considering the strong uptrend in most commodities. Gold witnessed mixed trade in the first half of the year and has registered near 1% decline.

The central government decided to curb the import of the precious metal by hiking the import duty on bullion from 7.5% to 12.5% on 1^st July 2022 this year, amid the widening trade deficit, and the rupee taking nose-diving to Rs.80 to US$.  Gold also attracts a 2.5% Agriculture Infrastructure Development Cess (AIDC), adding up total duty of 15%. However, one may recall that last year the government cut the import tax to 7.5% to strengthen the domestic market. So, a hike of 7.5% on import duty can be termed as a reversal to maintain the balance. 

Considering that we meet domestic demand by way of gold import; such a step may lead to a proportionate rise in the price of domestic gold by around Rs.2000/10gm, factoring in international gold prices which are trading with a slightly negative bias. With domestic prices surging, demand is likely to take a hit at a time when the country is already grappling with high inflation.

Impact on Gold consumers of India:

Since the onset of the Coronavirus pandemic, gold prices escalated significantly in India. In March 2020, the gold rate was between Rs. 41,000 and Rs. 43,000 per 10 grams, making a historic high of Rs. 56,000 in August 2020. Currently, it is around Rs 53,300 at the time of writing this blog.

Higher prices due to duty hikes, slower economic activity, and tightening liquidity conditions due to interest rate hikes may impact gold demand significantly. The import duty hike will lead to a rise in the prices of gold jewelry in the country. With the GST rate hike on cut and polished diamonds from 0.25% to 1.5% from July 18, jewelry will most likely get dearer.
The move may affect exports too, which in May 2022  witnessed a year-on-year growth of 20% (Source: Gem and Jewelry Export Promotion Council).

Consumers consider gold as a hedge against inflation. However, this may not be the right time to invest in gold (SIP through gold ETF continues to be an exception), but, move the funds to be invested to sector-specific equities, Mutual Funds (via SIP route), and Corporate fixed deposits of AAA-rated companies which are giving attractive interest upto 7.40% p.a for 36month tenure.

 

Author

Thakur Ajit Singh

Co-Founder

Graded Financial Services | Quick Turtle | AskCred

Email: gradedfinserv@gmail.com