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Will more Import Duty Hikes curb India’s Passion for Gold?

Will more Import Duty Hikes curb India’s Passion for Gold?

Will more Import Duty Hikes curb India’s Passion for Gold?

India’s total Gold Imports in January this year surged 23% to 100 tons, the highest in 18 months, as traders stocked up ahead of the duty hike by a government struggling to rein in its import bill, according to the Bombay Bullion Association. The massive cache of shipment clearly undermined the government’s efforts to curb imports. A purchase of 100 tons in one month is around 40% more than the monthly average. This has got the government worried once again. Indian Gold Demand could rise nearly 12% to as much as 965 tons in 2013 as per the World Gold Council report last week. Imports accounted for almost all the 864 tons of Indian Gold Demand.  A further rise in import duty seems very much likely. Indian Gold Futures traded on the MCX have fallen nearly 2% so far in 2013. Despite the higher duty, local Gold Prices have gone down due to the drop in overseas prices as well as the rise in the Rupee against the US Dollar. India’s undying passion for Gold has got the government worried especially since around 20,000 tons is reportedly lying unused with Indian households. The government wants to make physical Gold buying unattractive. India’s passion for Gold, seen by many as a hedge against persistently high Inflation, means Gold Bullion comes second only to Crude Oil in the import bill of Asia’s third-largest economy. Much of rural India, however, lacks adequate banking to offer alternative investment options, keeping gold popular. Less than 10% of the total number of villages in India has banks, an MMTC (Minerals and Metals Trading Corporation) official said & as reported by Reuters. Gold Demand in India seems sluggish as buyers postponed purchases expecting further sharp drop in Gold Prices. India’s government may further raise import duties on Gold or put a cap on purchases in a bid to rein in the Current Account Deficit in the 2013/14 budget, an official with the biggest state-run gold importer – MMTC said. The government had already hiked import duties by 2% to 6% on Jan. 21 to discourage higher Gold imports. The Government of India may cap imports, impose a fresh set of duties or cut the number of companies authorized to import gold if purchases have not slowed down by the time it announces the 2013/14 budget on Feb. 28. The Reserve Bank of India, had earlier indicated it could limit Gold imports by banks, which corner about 60% of supply. MMTC’s Gold purchases this fiscal year were down to around 30-40 tons from last year’s 160 tons.

India Trade deficit of $20 billion on Imports surge:

India posted its second highest ever monthly trade deficit of $20 billion in January as imports surged to record highs, piling pressure on a widening current account deficit and limiting scope for the central bank to cut interest rates. The January trade deficit was the second worst on record. The worst figure was $21.9 billion posted in October. The RBI – Reserve Bank of India warned that future rate cuts would depend upon declines in both the current account deficit and inflation after it cut interest rates by 0.25 percentage points last month. Imports rose 6% to $45.58 billion, their highest ever monthly total. Imports of crude oil, the single biggest item, rose 6.9% from a year ago to $15.9 billion. The oil import bill is definitely a challenge, but for a growing economy, energy needs have to be met. The Reserve Bank of India is worried that India’s ability to fund its rising current account deficit is becoming increasingly stretched, and could lead to fresh pressure on the Rupee, which in turn could hike up Gold Prices in India if it starts weakening again. The high current account deficit is unsustainable as it can’t be funded for a long time with capital flows and it will get adjusted through the exchange rate. The exchange rate will depreciate when the correction happens. Portfolio inflows into India have been robust, with $8.34 billion so far this year after inflows of $31.41 billion in the whole of 2012. “Consumption cannot be stopped in India,” said Minawala, of the All India Gems and Jewelry Trade Federation. “Irrespective of all the measures that the government brings on, imports could touch 850 to 950 tons this calendar year,” he added.

SEBI allows Gold ETFs to invest in Banks’ Gold deposit schemes:

In an attempt to curb physical Gold Demand & boost Gold ETFs, India’s securities regulator, Securities and Exchange Board of India (SEBI) has allowed Gold ETFs – Exchange Traded Funds to invest in GDS – Gold deposit schemes offered by banks. The move would also bring additional returns to Gold ETFs allowing them to beat their benchmarks. The total investment in GDS cannot exceed 20% of the total assets under management of any scheme. SBI, which launched a gold deposit scheme sometime ago, offered 1% interest on deposits of longer duration.  Assuming fund houses use up the entire 20% limit prescribed by SEBI, it would result in up to 10-20% gains for investors even if banks pay just 1% interest. Analysts said the move was in line with India’s efforts to cut down gold imports and also to utilize idle assets of the precious metal for more productive purposes. A panel by the RBI has estimated that about 20,000 tonnes of idle gold is lying with the people. The Reserve Bank of India aspires to channelize the idle Gold Bullion for productive purposes and also check the demand for imports. As per SEBI guidelines, before investing in GDS, mutual funds would have to put in place a written policy related to the investment with due approval from the Board of the Asset Management Company and the Trustees.

Gold and Silver Coins sale in China celebrating the Year of the Snake:

Year of the Snake Gold and Silver Coins

Year of the Snake Gold and Silver Coins

Residents lined up in banks waiting to purchase the commemorative coins of the Year of Snake in Shaoxing, Zhejiang, on Jan 9, 2013. The Central Bank issued 80 million coins with a face value of 1 Yuan. Each resident is only allowed to purchase two. The commemorative coins can be circulated in the currency market with the same denomination as ordinary 1 Yuan coins. China’s central bank, The People’s Bank of China has issued a series of commemorative coins to mark the 2013 Year of the Snake. The program includes 8 Gold Coins, and 7 Silver Coins across a variety of sizes and shapes, with two primary designs. The inscriptions include the title of the PRC and the “2013? date. The reverse design which is used across eleven different coins includes a depiction of a snake against a background with a decorative snake pattern. The inscriptions include “Gui Si” (Snake) in Chinese and the legal tender denomination.

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