Gold: Custom Duty Cut To Make Yellow Metal Cheaper In Short Term; But Fed Rate Cut Hopes May Bring Bulls Back

In a major good news for gold and silver lovers and companies in the gems & jewellery segments, the Finance Minister Nirmala Sitharaman in her seventh Budget speech on July 23, made a surprise and very steep cut in custom duty of gold bar, gold gore, silver bar, and silver gore. This is likely to make gold cheaper and affordable for citizens, and accordingly, prices are expected to fall in the short term. Another key boost from this move could be taming smuggling in the world's second largest bullion market. However, the upcoming US Federal Reserve policy has the potential to bring back bulls.

Sitharaman trimmed custom duty on gold and silver bars by a massive 60% to 6% from the earlier 15%. While customs duty on gold and silver gore has been cut by 62.7% to 5.35% from earlier 14.35%.

She said, "To enhance domestic value addition in gold and precious metal jewellery in the country, I propose to reduce customs duties on gold and silver to 6 per cent and that on platinum to 6.4 per cent."

Vipul Shah, Chairman, of the Gem & Jewellery Export Promotion Council reacted to the Budget announcement for the gems and jewellery sector. He said, "The Union Budget 2024 is a game-changer for the gems and jewellery sector. The reduction in import duties on gold and silver to 6% and platinum to 6.4% is a major boost for our industry, enhancing affordability for consumers and competitiveness for the manufacturing sector by releasing working capital."

Further, as per Shah, the abolition of the 2% Equalization Levy and introduction of the Safe Harbour Rule on the sale of rough diamonds at SNZs will firmly establish India as a global rough diamond trading hub.

Accordingly, the GJEPC chairman said, "These combined measures will propel the sector's growth, generate lakhs of employment opportunities by benefitting the small-scale jewellery manufacturers & exporters and diamond cutters and polishers, thus contribute significantly to India's vision of becoming a Viksit Bharat by 2047."

Highlighting that gold prices have surged by 40% in the last three years, Kinjal Shah, Senior Vice President & Co-Group Head - of Corporate Ratings, ICRA said that the yellow metal will soften with the reduction in BCD to 5% from the current 10% and AIDC to 1% from 5%, thus supporting overall demand for physical gold and jewellery.

However, ICRA's expert added, "Certain players in the industry, especially the ones who do not hedge the gold prices, could face some inventory losses in the near term. Rationalisation of duties will help accelerate formalisation of the gold jewellery industry, enabling meaningful conversion of unorganised to organised trade."

Kinjal added, "Safe harbour rates will encourage foreign mining companies to sell rough diamonds directly in India, as against current imports, thus facilitating timely and cost-effective procurement by Indian diamantaires."

Some of the benefits of the customs duty cut in gold would be tackling the illegal trade of yellow metal, enhancement in tax revenues, and further bolstering the government's receipts.

MP Ahammed, Chairman, of Malabar Group said, the reduction in import duty on gold has been a long-standing demand for gold retailers, and we are extremely grateful to the Union Finance Minister for addressing this issue in today's Union Budget by reducing the duty from 15% (including cess) to 6%. This move not only relieves consumers who have eagerly awaited this announcement but is also expected to boost gold demand in the country and create jobs for artisans."

Explaining further in detail, Ahammed said, that high import duty often leads to increased smuggling of gold through illegal routes, which hampers the growth of the organized retail gold trade and results in revenue losses for the government. It is expected that the duty reduction will drastically cut down gold smuggling, thereby curbing illegal trade and enhancing tax revenues.

Hence, the Malabar Group chairman said, "This reduction benefits organized retail jewellers, consumers, and the government, making it a positive development for all parties involved."

Along the similar lines, Rahul Kalantri, VP of Commodities, Mehta Equities said that high import duties often incentivize smuggling to avoid taxes. On Tuesday, the government reduced import duties on gold and silver from 15% to 6%, which can now make legal channels more attractive. These moves could boost retail demand and reduce smuggling in the world's second-largest bullion market.

Coming to the prices of yellow metal, Anindya Banerjee, SVP: Head of Research: Currency, Commodity & Interest Rates, Kotak Securities believes it will fall in the short term due to customs duty.

Banerjee said MCX Gold and Silver prices faced significant selling pressure following a reduction in basic customs duty from 10% to 5%, and a decrease in AIDC from 5% to 1%, resulting in a total import duty of 6%. This move has led to a sharp decline in prices, with Gold down by Rs. 4000/10 grams and Silver plummeting by Rs. 4090/kg."

As per Banerjee, While cheaper prices may stimulate domestic demand in the medium term, short-term trends could be influenced by Federal Reserve policy decisions. There remains potential for further downside, given the unexpectedly high import duty cut.

This week, global factors to watch include the speech by the US Federal Reserve Chairman, US retail sales figures, and macroeconomic data from Japan. These developments are likely to influence market movements and investor sentiment. Santosh Meena, Head of Research, Swastika Investmart said, These developments are likely to influence market movements and investor sentiment."

Hopes for rate cut from US Federal Reserve have only surged further, which made led to robust upside in gold last week. However, uncertainties in US election and the expectations of upcoming American president, has also kept investors cautious. Nonetheless, lowering of interest rates makes non-yielding assets like gold attractive in the overseas market against US dollar and treasury yields.