The incumbent government said on Friday that India had raised its basic import duty on gold from 7.5% to 12.5%. The world’s second-largest consumer of gold is trying to dampen its demand and reduce the trade deficit.
Most of India’s gold demand is fulfilled through imports, putting pressure on the rupee, which hit a record low on Friday.
The duty hike on gold would lift prices and moderate demand in the nation, which could weigh global prices. But it could fuel under-the-counter buying and drive-up appetite for gold smuggled into the country, Indian trade officials said.
Prithviraj Kothari, managing director of RiddiSiddhi Bullions, said the sudden price rise could bring down jewelry demand this month.
After the duty hike, gold dealers offered a discount of nearly $40 an ounce over official domestic prices—including the 3% sales levies and 12.5% import.
In May 2022, India’s trade deficit widened to $24.29 billion from $6.53 billion a year prior as gold imports in the month surged to $6 billion from $678million a year ago.
In the short-term, gold demand could fall. Secretary at the India Bullion and Jewellers Association (IBJA), Surendra Mehta, said, however, in the long run, demand would remain strong, and imports would rebound.
The hike has raised the gap between overseas and local prices to over 15%, and this could boost the smuggling of gold in India.
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