Gold rates in India track international gold prices. So, when gold prices go up in the international markets they go up in Indian cities.
But, the problem is that gold rates in Indian cities differ from each other. Gold rates in Indian cities like Delhi, Mumbai, Kerala and Chennai differ. If you have noticed gold rates in Mumbai and Delhi are lower than that in Chennai.
Each state levies different local taxes. This is one reason there is difference in the gold prices in Mumbai with Delhi. It is hoped with the Goods and Services Tax (GST) coming into play there will be a uniform tax and hence gold price differences in various cities would be eliminated. Read What is GST or Goods and Services Tax?
Transportation costs also play an important role. Moving gold from the landed place to another place would entail costs, which could push up the prices of gold.
Big volume play
Jewellers in larger cities can offer a discount given the volume play. This could lead to a price differential in gold. This is why gold prices in cities like Mumbai could be marginally lower than others.
Gold associations and gold prices
Prices of gold also differ on account of associations that have a say in the price. In various cities like Mumbai and Chennai the gold associations fix the local price of gold. This happens twice a day and this could lead to different prices of gold in different cities.
How are gold prices in India determined?
It is also important to understand how gold prices in India are determined. Gold prices in India actually track the international markets. So, when gold prices go up there gold prices in India follow.
However, the rupee must also remain steady. If for example, if the rupee falls against the dollar than landed cost of gold would become expensive since India imports all its gold requirements.
Also, the government must not change the import duty structure of gold. When the current account deficit was out of control the government to prevent a slide in the rupee increased the import duty on gold. This made gold prices costlier. Read more on current account deficit here
Over the last two years gold has not given any returns. Prices have come down dramatically from levels of Rs 31,000 to the current levels of Rs 24,000. Analysts say there maybe more downside ahead given the possibility of interest rate hikes in the US.