Custom duty reduction impact: How gold prices may perform in near future
Sat July 27 2024
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.
Source: https://economictimes.indiatimes.com/