Why gold in India may not be a good bet ahead of the Union Budget?

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Why gold in India may not be a good bet ahead of the Union Budget?
With slightly less than two-weeks to go ahead of the Union Budget, investors have begun laying bets on gold and equity. While equity investors have turned bullish, one cannot be certain with regards to gold.

The one reason for that is that most analysts are with certainty predicting that government would reduce import duty on gold. The broad consensus is that import duty on gold could be slashed to 5 per cent from the existing 10 per cent. This is likely to make imported gold cheaper and hence softening of domestic prices.

But, will that happen is the question. If we go by fundamentals than the probability of import duty being lowered on gold is very high. The one reason why import duty on gold was raised was because the current account deficit had risen to alarming levels in the last two years. In fact, for 2012-13, the CAD had widened to a record 4.8 per cent of GDP, or $88 billion.

Check gold rates in your city here

It has now slumped to just 0.9 per cent of GDP, which is certainly manageable. The rising current account deficit was largely on account of increase in gold imports, which was when the government hiked the import duty to 10 per cent.

Now, when the current account deficit has fallen to 0.9 per cent of GDP, the government will have to seriously consider reducing the import duty. This becomes necessary also as the government by raising import duty has encouraged smuggling of gold into the country.

Also read Why current account deficit is bad for India?

In fact, news reports have emerged that smuggling has increased since the government raised import duty on gold.

Conclusion

One can expect the import duty on gold to fall and if that happens, one can expect gold prices to react. This means that it may not be a good time to take bullish bets on gold.

GoodReturns.in

Story first published: Saturday, June 28, 2014, 10:48 [IST]
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