FOCUS – Bullion market wrongfooted by lack of change to Indian gold import rules

Some bullion market participants were taken aback by the Indian government’s failure to change gold import duties and restrictions in its first post-election budget.

But other stressed the pressures on the country’s current account deficit (CAD) from higher oil prices – stemming from geopolitical tensions in the Middle East – that have stayed Prime Minister Narendra Modi’s hand this time, at least.

Many were disappointed in finance minister Arun Jaitley’s decision not to lower import duties on bullion from the current 10 percent or to repeal the 80:20 rule, under which 20 percent of gold imported into the country must be exported again with value added.

“Unfortunately, there was no change to the government’s policy on gold legislation,” All India Gems and Jewellery chairman Haresh Soni told the Bullion Desk. “That is very disappointing as it is a burning issue in the industry right now.”

“The market is very surprised by this,” Ajay Kumar of Kedia Commodities in India said, adding that various news outlets had predicted a cut to six percent in the import duty.

Still, other analysts had expected the lack of change in this instance despite Modi’s well-known pro-business stance.

“Even among those who expected a change, most thought it would be to the duty rather than to the 80:20 rule,” Chirag Sheth of Metals Focus said.

Recent spikes in oil prices – Brent crude hit $115.67 per barrel following terrorist group ISIS’ advances in Iraq, though it has since returned to $108.10 per barrel today – and a soft weak Indian rupee have negatively affected the country’s CAD, which was the main target of the import duties.

CAD, the difference between the inflow and outflow of foreign exchange, hit a record high of $88.2 billion in the 2012-13 fiscal year before falling to $32.4 billion in the following year.

In the quarter to March 31, the CAD was just $1.2 billion, down from $18.1 billion a year earlier, on a sharp drop in imports that more than offset a slight easing in exports. A high CAD puts pressure on the rupee, which makes imports expensive and fuels inflation – it hit a post-budget high of 60.22 against the dollar today.

India is a major gold importer – it was the world’s leading consumer before being overtaken by China last year. Gold is the second-largest import item after crude oil in India’s balance of payments.

Still, the government may not wait until the next budget before it decides to soften its export regime, Sheth added.

“We may not have to wait until next year’s budget but, given the fact that they have not done so now, I would be surprised if they changed policy before September, he said.

As well, New Delhi had made some changes to legislation prior to the budget, with more importers now allowed to bring gold into the country.

Premiums for locally delivered physical gold had declined sharply in recent weeks in anticipation of a further relaxation of the rules – having been as high as $100 per ounce landed cost for 1kg bars over London spot, they were today reported closer to $25-30 and even as low as $5-10 in some locations.

While Sheth believes the premiums may increase on the latest news, he rebuffed the idea that they could soar to record highs again, saying that increases of $5-10 “are possible”.

And while the volumes of gold that India is likely to import during the coming wedding and Diwali season is likely to fall, some analysts have said, ANZ, among others, took an opposing view.

“Ironically, we expect this to result in a rise in gold imports as an element of uncertainty for the industry has been removed,” the bank said. “A premium of $30 per ounce is conducive to import activity and traders that were holding out for lower duties to import gold, though disappointed, will now be active.”

(Editing by Mark Shaw)