Will gold turn cheaper after duty cut?

Ravindra Rao | Updated on February 02, 2021

India is a price taker and global trend will remain a key price determining factor

The year 2020 was a challenging one for all major economies including India as governments imposed strict measures to limit the virus spread but this impacted economic growth.

While the economy came under pressure, the commodities market was also not left unaffected.

Sharp volatility across commodities was witnessed as prices slumped earlier in the year owing to demand destructions, but recovered on the back of stimulus measures and robust Chinese buying as is evident from higher commodity imports.

Bullion sector

The 2021 Budget was presented against such a backdrop.

As for the commodities market, the expectations included reduction/removal of CTT, reforms in agricultural sector, cut in gold import duty and reforms for strengthening the bullion sector.

Although there has been no change in Commodities Transaction Tax, changes in customs duties were announced which has impacted commodities — mainly gold and silver on the domestic front.

The base customs duty on gold and silver will be reduced from 12.5 per cent to 7.5 per cent, but a 2.5 per cent agriculture infrastructure and development cess will be imposed on top of this. The net implication translates to around 10.75 per cent after considering the cess and applicable social welfare surcharge.

Since MCX gold and silver prices are inclusive of customs duty, a cut in tax will reduce domestic price. We saw the gold price falling sharply in reaction to the duty cut.

Price impact

However, the impact may not match the change in duty exactly. India is a major consumer of gold and silver and lower price may improve demand outlook, boosting international prices.

As a result, Indian gold and silver prices have become cheaper due to lower taxes. However, this will not affect the price trend. Since India is largely a price taker, the trend in the international market will remain a key price determining factor. Since we maintain a bullish view on COMEX gold and silver, we expect MCX Gold and silver also to trade with a positive bias. However, the base has shifted lower due to change in applicable taxes.

Also in bullion sector, in lieu of 2018-19 Budget announcement of establishing a system of regulated gold exchanges in the country, SEBI will be notified as the regulator and Warehousing Development and Regulatory Authority will be strengthened to set up a commodity market ecosystem arrangement including vaulting, assaying, logistics, etc in addition to warehousing. This is not likely to have any direct impact on price.

The writer is VP-Head Commodity Research, Kotak Securities. Views are personal

Published on February 02, 2021

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