Expert view: Anindya Banerjee, Head of Commodity and Currency Research, Kotak Securities, in a telephonic conversation, told Mint that gold and silver import duty hike could spark investment demand, although consumption demand may take a hit. However, he doesn’t see a massive impact on India’s foreign reserves from this action. “The real wild card as far as the effects are concerned, are oil import bill, gas import bill, and fertiliser,” he said. Edited excerpts:
Government has hiked import duty on gold and silver. What kind of implication do you see for gold and silver from this action?
Gold prices have immediately increased because they have to be around the import parity. As far as the demand is concerned, at least the investment demand won’t be impacted. In fact, it will be encouraged.
This is because the investment demand is directly proportional to the increase in prices. People buy things which go up, not things that fall. As far as the jewellery demand is concerned, it will be impacted.
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Gold and silver prices have immediately increased to align with import parity. The import duty hike, including Customs Duty and GST, has made gold approximately ₹27,000 per 10 grams costlier, pushing up domestic prices regardless of global trends.
The import duty hike is expected to impact jewellery (consumption) demand, potentially slowing it further. However, investment demand is anticipated to remain strong or even be encouraged, as price increases often attract investors.
Yes, there is a concern that the 15% import duty creates an arbitrage opportunity, potentially encouraging smuggling. This is a known risk that the government is likely aware of and monitoring.
The government aims to curb non-essential imports to ease pressure on foreign exchange reserves and support the rupee. While the immediate impact on reserves might not be substantial, a reduction in consumption demand could lead to a slight decline in outflows.
Structurally, the outlook for gold and silver in dollar terms remains bullish, driven by themes of de-dollarization and de-globalization. Experts predict that over the next 3-4 years, prices could be substantially higher, potentially reaching $7,500 to $8,000 conservatively.
It was, anyway, sluggish. It might further be impacted because, after Prime Minister Modi’s appeal, people are shying away from buying for a national cause, and this import duty hike will create a negative impact.
The govt action is aimed at curbing demand, but you believe it might not be the case. So, how do these measures really help?
When we are looking at demand, we have to look at a couple of things. First of all, you have to look at the value and the quantity. We have to look at it from an investment and consumption perspective. Consumption demand is indirectly proportional to an upward price increase.
Investment demand, at this point, will stay constant because there are a lot of aspects to it. People who are allocating regularly would keep buying gold even in SIP format or in physical form.
Those things may or may not change. Ideally, gold’s investment demand will only be impacted because of the appeal of the metal and not because of import duty.
Overall, I think, the immediate import duty impact on demand is not much. Over a period of time, it depends not only on import duty, but also on the overall gold price trajectory. If gold prices remain stable for the next 6-7 months, then you will see jewellery demand slowly improve. But investment demand may then remain flat.
Do you see gold ETFs gaining from this hike in import duty?
ETF will not get impacted; it should not. Only the people who are holding the ETFs will enjoy the 6-7% jump overnight. Ultimately, whether you are buying an ETF, an EGR or physical gold, the price will be the same.
Do you expect the import duty hike to encourage gold smuggling?
The government is aware of that, I believe. When you create a 15% spread, there is an arbitrage, and people will try to take advantage of that. But the government knows it very well, and we have to understand that these measures are not normal policy measures.
They are like the ones we had during the COVID time. We had social distancing norms, masking, sanitisation, et cetera. The moment COVID was over, all those things were removed. The same thing might happen here. The Prime Minister said one year. So let’s say over the next 1-1.5 years, as this war in West Asia comes to an end, all these measures might be removed. So, this is a temporary measure.
Also, over that period of time, the government will be quite vigilant across places where such things can happen.
Equity investing hasn’t really yielded returns from the Indian market perspective, and investors have turned to gold. Do you think this hike is unfair to retail investors?
Investor means investment demand. The gold and silver prices have increased, even before the announcement. And we have seen a sudden jump in queries from investor clients. So, a price increase is actually going to attract more investors into the market.
Ultimately, everything will fall on international prices. If tomorrow the gold and silver prices are higher, people will be back allocating their money because they would like to chase the hottest assets.
This move is aimed at protecting foreign reserves and conserving rupee. How much of an impact do you see playing out from that perspective?
Gold imports have seen a sharp jump in the last financial year. But you will not have an immediate impact on the foreign exchange reserves. Last year’s price jump had also led to higher dollar outflows. What happens now is also a function of what happens to the dollar.
If gold and silver prices remain stable, we might see a slight decline because I’m assuming the consumption demand will fall, and the investment demand could lose momentum. But those are factors which are beyond import duty.
The real wild card as far as the effects are concerned, are oil import bill, gas import bill, and the fertiliser.
What is your outlook on gold in general?
As far as gold and silver in dollar terms are concerned, we are structurally still bullish. We have been since 2024 because our central theme has been de-dollarisation and de-globalisation. This whole switch towards green and alternative energy, with the energy crisis, will only accelerate. So in both cases, we need silver as a conductor and gold as a reserve currency, extracting the premium from the dollar. If these structural factors continue, we expect that over the next 3 to 4 years, gold and silver prices in dollar terms can be substantially higher. From the current levels, it could go even so far to $7,500 to $8,000 conservatively.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
