India’s Finance Minister is back to his Favorite topic: curbing gold demand. India appears set to take even more steps to curb gold demand if imports continue to rise at the current pace.
Speaking to the media on the sidelines of a conference, he pointed out, as consumers across the country thronged jewelry outlets this past month given the fall in the precious metal’s price, that the government has decided not to distance itself from the financial problems caused by the ever-rising demand by curbing gold imports yet again, despite the many measures already taken in the last few months.
Higher gold imports have been curtailing the government’s efforts to stem the yawning gap in the country’s current account deficit See also: India’s ultra rich are buying gold. However, jewelers in the country are already facing the music, given the extremely perilous situation with low gold stocks and correspondingly high premiums of around $40 per ounce or more.
India has been the world’s biggest consumer and importer of gold, and most purchases are an essential part of Indian weddings and religious festivals. The country’s purchases of gold and silver shot up 138% in April to $7.5 billion, the highest so far this year, pushing up the country’s trade deficit to $17.7 billion. India had imported just 471 tonnes in 2020-21.
Last week, India’s central bank the RBI restricted, with immediate effect, the import of gold on consignment basis by banks. Even as the move will limit imports to a large extent, the government has said imports can be brought in only to meet the genuine needs of exporters of gold jewelry. However, retailers say the central bank’s move is expected to lead to higher forex outgo on each transaction.
“Nominated banks in India are allowed to import gold from an overseas supplier. This is on a metal loan basis, which is denominated in terms of the quantity of gold,” said an official of an importing bank.
From the date of the shipment abroad to the time of the sale realization in India, nominated banks have to bear the interest cost, which is at prevailing international rates. The official added that foreign exchange outgoings would be huge and banks would definitely not bear the cost and try and get the interest rates payout from local gold retailers. Bullion houses, in turn, will pass on this added cost to the end users – the customer.
All of this will ensure that the gold bracelet or the chunky chain will become more expensive for the Indian bride, and despite the dip in gold price, she will not be able to partake in the current price slide to the fullest extent.
Moreover, several small and medium jewelry manufacturers across the country, are also set to be hit. These traders have been depositing their daily sales realizations with nominated banks. Now, with the government’s latest move, they will be forced to lock up funds to maintain the necessary stock level.
Small players are bound to get marginalized in the already highly competitive trade. This will also impact their future fund-raising capabilities.
The Indian government has already taken several steps in the recent past, including raising import duties twice, basic customs duty on gold was 7.5 per cent, now it will be 12.5 per cent, to curb inbound shipments. Last week, the government announced that it would issue index linked bonds early June, to try and wean away investors from gold.
India’s finance minister said that the government had anticipated an increase in gold imports in April and May, since “all over India, these are months when there is the largest number of weddings. So, we were not surprised that gold imports increased in the second half of April,” he told the media.
ALARM BELLS for gold in India.
Metals and Minerals Trading Corporation of India (MMTC) has already sounded the alarm bells. An official said India’s gold imports are expected to fall by 50% to below 500 tonnes this fiscal – if the RBI’s recent move to restrict banks’ bullion imports is completely effective. The official added if the notification is not released, the country’s overall gold imports are likely to cross the 1,000 tonne mark this year given the downtrend in gold prices and high domestic demand.
Incidentally, MMTC’s overseas purchase of gold could increase sharply to 200 tonnes, as against 38 tonnes last year, if RBI curbs are not imposed, the official added. Gold prices have declined by 15% as compared to a year ago. However, high premiums in the spot market continue to limit purchases at the retail level.
Jewelers across the country have been complaining of high premiums on gold and limited availability. While some banks are charging premiums on London prices at around $20 to $30 an ounce, retailers say the large buy orders from China and Dubai are responsible for pushing up physical premiums to levels not seen for a long time.
While Hong Kong and Singapore buyers are paying a premium of around $5 per ounce for a gold bar, Dubai buyers are paying a premium of $10 per kilo. Turkey was reportedly paying a premium of $25 an ounce over the London price, while many retailers in India say they have been coughing up premiums of nearly $40 per ounce.