Mumbai: Gold which had reached dizzying heights of Rs 57,000 in August 2020 and an epic contraction in Christmas'20 was likely to see more contraction after the swearing of the US President.
Turns out Gold in India could get a tad affordable. This could be the perfect opportunity for those who missed buying Gold during the surge of August 2020.
Gold price is likely to dip, thanks in part to a budget proposal that Finance Minister Nirmala Sitharaman announced on Monday.
In her budget speech, Sitharaman announced rationalizing customs duty on precious metals such as Gold and Silver. She said that duty was being rationalized to bring it on par with previous levels. In July 2019, the government had increased the customs duty to 12.5 percent from 10 percent.
While the FM did not reveal the exact quantum of duty in her speech, the budget documents revealed that customs duty on precious metals is likely to in range of 7.5 percent plus an additional cess (Agricultural Infrastructure and Development Cess) of 2.5 percent and social welfare surcharge. This would mean Gold imports through official channels carried a net duty of 10.75 percent as opposed to 12.75 percent previously.
This was likely to bring down the cost of Gold and Silver in Indian rupees. Affordable Gold may in turn boost demand and spur India's imports of both the yellow and silver metal.
The rationalizing is likely to result in a change of Rs 967 per grams at the cost of Rs 48,388 per 10 grams as on Monday (MCX Gold).
Ravindra Rao, VP-Head, Commodity Research at Kotak Securities believes that domestic price may fall, however he is not too enthused that rates could sink as low as they were during the start of the Covid crisis.
In a note, he explains, “Since MCX Gold and silver price is inclusive of customs duty, a cut in tax will reduce domestic price. We saw the gold price falling sharply in reaction to the duty cut. However, the impact may not match the change in duty exactly. India is a major consumer of gold and silver and lower price may improve demand outlook boosting international prices. Going forward, Indian gold and silver prices have become cheaper due to lower taxes however this does not affect the price trend. Since India is largely a price taker, trend in the international market will remain a key price determining factor. Since we maintain a bullish view on COMEX gold and silver, we expect MCX Gold and silver also to trade with a positive bias. However, the base has shifted lower due to change in applicable taxes.”
Echoing similar sentiments, George Alexander Muthoot, MD at Muthoot Finance said, “Among the several business friendly announcements, some that stood out for us include net rationalisation of customs duty on gold by 2.5% which should bring more gold into the country through official channels."
Chirag Mehta, Sr Fund Manager at Quantum Mutual Fund too expressed an optimistic view on the proposal. "The net effect will be lesser than the 5% reduction that the headline number suggests. The immediate effect of this move will be that gold prices will decline to the extent of reduction of levies. All those holding gold will see the value erode to that extent whereas all those who want to buy more will get it relatively cheaper to that extent," he said.
He believes that the proposal may help discourage illicit gold imports and better price discovery mechanism.
"Higher intervention through higher customs duty has all this while ensured that India could never be at the center of the global gold markets despite being the largest consumer and thus remain a price taker. Price distortions make it difficult to channelize the hoard of India’s gold savings into circulation and thereby integrate the gold market with other financial markets," adds Mehta.
There is also consensus among the Gold fraternity that rationalization was long due. Several agencies have mooted for lower tariffs and duties to ensure better price discovery mechanism. "This rationalization (Budget 2021) has been long due given duties were as low as Rs. 100 per 10 grams during the previous BJP regime of 2001-04 when then Finance ministers Yashwant Sinha and Jaswant Singh had taken positive steps of duty reduction amidst an optimistic view of the development of the Gold sector.
Gold featured at least three times in the Finance Minister's speech on Monday. The other two times when she spoke about a Gold exchange. The Gold Spot Exchange being proposed would help bring transparency and standardization. "The creation of a spot gold exchange will bring twin benefits for Gold ETFs by adding to the liquidity pool as well as leading to more efficient price discover," adds Mehta.
Sitharaman's proposal of reducing duty may sound as a rare moment in the life of a Finance minister. However, it should also be noted that the decision has arrived on the heels of feeble gold imports during the Covid crisis.
According to the World Gold Council, global demand for the yellow metal plummeted by 14 percent in 2020 to a 11-year low of 3,759.6 tonnes. Gold saw significant Demand in the ETF category but physical Gold demand remained low through last ten months of 2020.
Any affordability is likely to hence act as a positive cue helping jewellers and trade associations from the industry.
Budget 2021 overall has been met with mixed response. On Dalal Street, the mood was emphatic thanks largely to no new taxation policy. The MCX futures for 5th February however contracted by 1.5 percent. Farmer associations and common-man also rued that there was nothing specific in store for them.
Disclaimer: The story is purely for information purposes. Readers are recommended to seek opinions from a SEBI registered analyst prior to investing or trading in commodity markets.