The government’s decision to slash import duty on gold from 15% to 6%, announced in the Budget, should have been a cause for celebration. But it was not. The decision sparked a 9% fall in gold prices in July, plunging from an all-time high of Rs 74,000 to Rs 68,000 per 10 gm. That caused considerable heartburn among investors in gold exchange-traded funds (ETFs) and sovereign gold bonds (SGBs) since their values dropped by 5-6%. Prices have recovered slightly since then, following foreign trends, to around Rs 71,500 per 10 gm on August 27.
The duty cut represents a departure from government practice of the recent past of raising rates to reduce imports, since this was one of the major sources of forex outgo and the resultant widening of the current account deficit.
While some were upset, others had reasons to cheer, since the fall in gold prices provided some respite from the strong rally in gold prices over the past couple of years, as it jumped from around Rs 49,000 per 10 gm in 2022 to Rs 74,500 in 2024, tracking a similar rise in foreign markets. In fact, the actual price of physical gold was higher than that amount after the addition of duties and taxes that included 10% customs duty, 5% Agriculture Infrastructure and Development Cess, and 3% goods and services tax (GST). That adds up to 18% inflation over the overseas price, prompting some buyers to purchase gold abroad and bring it into the country unofficially, leading to a revenue loss for the government, says Hareesh V., Head of Commodities at Geojit Financial Services.
He says the cut was a long-standing demand of some stakeholders. “Cutting down the import costs will reduce the price difference between domestic and overseas gold… this decision would lead to lower input costs, stimulate domestic manufacturing, and, most importantly, it will boost the export competitiveness of our jewellers,” adds Hareesh. He highlights the domestic gems and jewellery industry as a beneficiary since Indian products will become more competitive globally because of lower production costs.
But others say the quantum of reduction may hurt the industry since it was expecting only a 2% cut and not the 9% announced. “So, those in the industry who had hedged positions were much better placed than those who hadn’t, as their purchase cost would be at higher prices and they may have to sell at lower prices,” says Pranav Mer, Vice President- Commodity & Currency Research at JM Financial Services Ltd.
Plus, the immediate dip after the cut may be just a blip, Mer says, since there is a strong uptrend in the international markets and support around $2,350–2,370. “Also, we have seen a good recovery towards $2,500 in the overseas market, while prices in the Indian market are confined between Rs 68,500 and Rs 71,100,” he adds. Prithviraj Kothari, MD of trading firm RiddiSiddhi Bullions Ltd (RSBL), says the cut is good for customers, but future price trends will depend on a host of factors, including global economic conditions, currency fluctuations, particularly the US dollar, and inflation rates. “Additionally, demand during key seasons like weddings and festivals in India could drive prices higher,” he adds. Geopolitical tensions and central bank policies, especially interest rate changes, will also play a crucial role in determining gold’s value.
For investors in SGBs, experts say there is no need to panic since the duty reduction led to a slight, temporary dip in the value of their bonds in the secondary market. But, SGBs have a fixed 2.5% annual interest rate, which remains unaffected by price fluctuations, ensuring a stable income stream. Besides, the cut affects all gold investments equally.
“As gold demand increases, especially during festive and wedding seasons, prices could stabilise or rise, benefiting SGB holders through potential capital appreciation. The duty cut might also boost market sentiment towards gold investments, supporting the value of SGBs over time,” says Kothari.
There is, of course, a potential downside to the economy since the lower prices could spur demand and imports. This could widen the trade deficit, says Mer. But cut or no cut, experts feel that a 10-15% exposure to gold in the portfolio will help balance the volatility in equities. In fact, the lower prices could be used to increase gold exposure through digital gold, gold ETFs, or SGBs, says Kothari.
“Historically, gold has given great returns,” says Hareesh.
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