Customs duty rises on gold, silver: Will buying slow or stay strong?
Gold and silver have turned costlier after the government raised customs duty. The move has immediately sparked questions in bullion markets. Will higher prices cool demand, or will buying continue to stay strong despite the hike?
The Government of India has increased the effective import/customs duty on gold and silver from around 6% to 15% (10% Basic Customs Duty + 5% AIDC). Since India imports most of its gold and silver requirements, this directly increases the landed cost of bullion in the domestic market.
IMPACT ON MCX GOLD AND SILVER PRICES
The rise in the import duty on gold and silver immediately impacted on MCX gold and silver prices. MCX prices usually rise sharply because imported bullion becomes costlier, domestic prices start trading at a bigger premium over international COMEX/LBMA prices and futures contracts on MCX quickly adjust to reflect the higher import cost.
Today’s reaction itself showed that MCX gold futures surged more than 6–7% while silver futures jumped around 6–8% after the announcement.
WHY MCX RISES MORE THAN COMEX
MCX pricing formula roughly works like: International Price + USD/INR + Import Duty + Taxes + Premium so even if COMEX gold remains stable, a customs duty hike alone could push MCX prices higher.
IN THE SHORT-TERM IMPACT ON GOLD AND SILVER
Strong domestic premium, short covering rally and arbitrage widening between MCX and COMEX.
On the other hand, profit booking can emerge and demand destruction may happen at higher prices, jewellers may reduce purchases and physical premiums can cool down later.
MEDIUM-TERM EFFECTS ON DUTY HIKE
Higher customs duty can reduce official bullion imports, and this may support the Indian rupee and current account deficit.
However, slow jewellery demand may increase chances of smuggling.
(Disclaimer: The article has been authored by Nirpendra Yadav, Sr. Commodity Research Analyst at Bonanza. Views expressed are personal.)
The Government of India has increased the effective import/customs duty on gold and silver from around 6% to 15% (10% Basic Customs Duty + 5% AIDC). Since India imports most of its gold and silver requirements, this directly increases the landed cost of bullion in the domestic market.
IMPACT ON MCX GOLD AND SILVER PRICES
The rise in the import duty on gold and silver immediately impacted on MCX gold and silver prices. MCX prices usually rise sharply because imported bullion becomes costlier, domestic prices start trading at a bigger premium over international COMEX/LBMA prices and futures contracts on MCX quickly adjust to reflect the higher import cost.
Today’s reaction itself showed that MCX gold futures surged more than 6–7% while silver futures jumped around 6–8% after the announcement.
WHY MCX RISES MORE THAN COMEX
MCX pricing formula roughly works like: International Price + USD/INR + Import Duty + Taxes + Premium so even if COMEX gold remains stable, a customs duty hike alone could push MCX prices higher.
IN THE SHORT-TERM IMPACT ON GOLD AND SILVER
Strong domestic premium, short covering rally and arbitrage widening between MCX and COMEX.
On the other hand, profit booking can emerge and demand destruction may happen at higher prices, jewellers may reduce purchases and physical premiums can cool down later.
MEDIUM-TERM EFFECTS ON DUTY HIKE
Higher customs duty can reduce official bullion imports, and this may support the Indian rupee and current account deficit.
However, slow jewellery demand may increase chances of smuggling.
(Disclaimer: The article has been authored by Nirpendra Yadav, Sr. Commodity Research Analyst at Bonanza. Views expressed are personal.)
