India raised import duties on gold and silver in an attempt to defend its currency, as the country races to shore up foreign exchange reserves and cushion the economic impact of the ongoing conflict in West Asia.
The government more than doubled import taxes on gold and silver to 15 per cent from 6 per cent, according to two official orders, imposing a 10 per cent basic customs duty alongside a 5 per cent agriculture infrastructure and development levy.
The hikes, which aim to cut demand in the world’s second-largest bullion market, follow a rare weekend appeal from Prime Minister Narendra Modi. He urged citizens to forgo gold purchases as well as unnecessary foreign travel to help hold up the currency.
India, the world’s third-largest oil importer, has been grappling with inflationary pressures caused by disruptions in energy supplies from the Persian Gulf. Gold is the country’s most significant commodity import after crude. Higher import bills have driven sharp foreign-exchange outflows, pushing the rupee to a record low and prompting the RBI to step in.
The higher duties are expected to increase the domestic prices of gold and silver. However, demand linked to weddings is unlikely to weaken significantly, according to Chirag Sheth, principal consultant for India at consultancy Metals Focus Ltd. “In the immediate term, people may stop buying gold to wait for prices to settle.”
Gold remains central to Indian household savings, weddings and religious ceremonies. The country imports nearly all of its gold requirements, bringing in 710 tonnes last year. Although prices have eased somewhat since the outbreak of the Iran conflict amid inflation concerns, the precious metal has more than doubled in value over the past few years.
“This is more of a big deal for the commodities market than for the rupee,” said Anindya Banerjee, Kotak Securities’ head of research for currencies, commodities and interest rates. “With the import duty hike, the rupee may not get much support, but jewellery demand may be hit,” he added. “Oil is the main issue here for the rupee, not gold.”
Dubai connection
The significant increase in the import duty on gold may lead to an increase in imports from Dubai through the free trade agreement route, think tank GTRI said on Wednesday.
The duty hike also sharply changes the economics of precious metal imports routed through the United Arab Emirates under the India-UAE Comprehensive Economic Partnership Agreement.
India had allowed imports of gold from Dubai at tariffs one percentage point below the normal Most-Favoured-Nation (MFN) rate through a Tariff Rate Quota (TRQ) system.
The quota began at 120 tonnes annually in 2022 and is set to rise to 200 tonnes by 2027, nearly one-fourth of India’s yearly gold imports.
“With the new structure taking effective duties to 15 per cent, gold imported under the UAE quota would enter at 14 per cent. The widening tariff gap could encourage greater routing through Dubai, even though the UAE is not a miner of gold or silver,” the GTRI said.