Major gold financier stocks, such as Manappuram Finance, Muthoot Finance, and IIFL Finance, jumped 4-5% on Wednesday following a sharp jump in gold and silver prices after the government hiked import duties on gold and silver to 15%.
Manappuram Finance shares ended 5.63% higher, while those of Muthoot Finance and IIFL Finance jumped 4.65% and 4.31%, respectively, on the BSE.
The government has increased the basic customs duty on several categories of gold and silver imports to 10% from 5%, along with the Agriculture Infrastructure and Development Cess (AIDC) of 5%, taking the total effective import tax to 15%.
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Gold financier stocks rose because the jump in gold prices increased the value of collateral pledged with them. Higher gold prices also allow borrowers to access larger loan amounts without pledging additional gold, boosting demand and prospects for revenue and profit increases for these companies.
Gold ETFs are expected to gain traction as investors may switch from physical jewellery due to higher costs and taxes. Conversely, jewellery stocks faced selling pressure due to fears of reduced demand, though some like Senco Gold and Titan Company saw bounces.
The government hiked import duties on gold and silver to curb precious metal imports, narrow the trade deficit, and support the rupee. This move aims to discourage non-essential imports and conserve foreign exchange reserves amidst rising global uncertainties.
The increase in import duties to 15% will raise the landed cost of imported bullion, likely pushing domestic gold and silver prices higher. This could lead to a mechanical re-pricing of gold and silver in India to a new import parity.
The import duty hike is expected to make gold costlier, potentially impacting jewellery demand, especially in price-sensitive segments. Some fear it could lead to a rise in smuggling and the development of a grey market, while others anticipate consumers might opt for lighter-weight jewellery.
The government’s move is aimed at curbing precious metal imports, narrowing the trade deficit and supporting the rupee.
Following the government’s move, which came into effect on 13 May, gold June futures on MCX surged 6% while silver July futures vaulted 7% despite apprehensions that increased import tariffs will hit retail demand.
“The government’s decision to hike import duties on gold and silver from 6% to 15% is a tactical manoeuvre designed to safeguard the rupee and stabilise the current account deficit amid escalating West Asia tensions. While this ‘duty shock’ is expected to dampen immediate retail demand and jewellery volumes by 10-15%, the higher tax structure effectively creates a robust floor for domestic prices, preventing any significant downward slide,” Ajay Garg, Director and CEO, SMC Global Securities, observed.
Why did gold financier stocks rise today?
It is the jump in gold prices that pushed gold financier stocks higher on Wednesday.
Gold financers provide retail loans with gold as collateral. So, when gold prices rise, the value of the pledged collateral with them rises too.
Another angle that explains the rise in gold financier stocks is that an increase in gold prices offers an opportunity to borrowers to access a higher loan amount, without pledging additional gold. This creates a favourable environment for demand, raising the prospects of an increase in revenue and profits of gold companies.
The revenue and profitability of gold loan companies depend on the gold price. When the gold price rises, they can lend more for the same quantity of gold since the Loan to Value (LTV) is decided by the RBI increases. Therefore, the increase in gold price consequent to the hike in customs duty is beneficial to gold loan companies. Their revenue and profits will increase,” said VK Vijayakumar, chief investment strategist at Geojit Investments.
Ajit Mishra, SVP of Research at Religare Broking, also underscored that the rally in gold financiers was largely driven by the surge in domestic gold prices after the government raised import duty to 15%.
“Higher gold prices increase the value of collateral pledged with gold loan NBFCs, improving loan-to-value dynamics and expanding their lending capacity. The market is also factoring in stronger demand for gold-backed loans from households and MSMEs amid tighter liquidity conditions,” Mishra said.
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Disclaimer: This story is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
