London — The likelihood of the Indian government cutting the import tax on gold in the upcoming national budget is looking increasingly probable, according to sources.
Receive daily email alerts, subscriber notes & personalize your experience.Register Now
One dealer in Ahmadabad said that there there is the possibility of the current 10% duty being "slashed" in the budget -- scheduled for February 28.
However, although all appear in agreement that a cut of some kind is on the cards, talk of a reduction to 2% from 10% was described as wishful thinking by one refiner.
The average cut being heard by Platts in recent weeks is 2%-4%, taking the duty to 8% or 6%.
Regarding local demand the dealer in Ahmadabad said "there are less chances of premiums being quoted in the near future.
Not until March 1 at least, as the import duty is likely to be slashed at the budget." India regained its crown as the number one gold consumer in 2014.
It ceded the top slot to China in 2013 after decades as the world's largest importer and consumer of bullion.
"This was partly because the Indian authorities raised gold import tariffs sharply in 2013 in an attempt to rein in the country's burgeoning current account deficit," said HSBC analyst James Steel.
In January 2012, the government imposed a 2% duty on gold imports. This was increased by the same percentage, four more times, eventually rising to 10% by August 2013.
"The campaign had immediate effect. Total imports for 2013 were 825 mt, about 35 mt below the previous year, with the vast bulk taking place in Q1 2013 as investors and merchants bought ahead of the expected tariff increases," noted Steel.
According to the most recent data from the World Gold Council total gold demand reached 843 mt in 2014, down 14% from the 975 mt in 2013.
However, jewelry demand hit a record 662 mt, up 8% from 2013, including a 19% gain in Q4.
"We believe Indian gold demand would undoubtedly benefit if the government decided to cut gold import tariffs in response to the big drop in its current account deficit, which is largely the result of the fall in global oil prices," said Steel.
The India government had turned increasingly aggressive towards the gold market in order to shore up a massive current account deficit.
The surprise removal of the 80:20 rule late last year had a positive effect on the local market.
The rule meant that 20% of all imports had to be re-exported.
According to HSBC, on an annual basis, India's current account deficit hit a record high of 4.7% of GDP or $88.2 billion, in 2013, with $50 billion of it accounted for by gold demand.
Steel believes that although the current account deficit did contract in 2014, helped in part by a drop in gold demand, the bigger factor was the crash of the global oil price.
"We think the rationale for the high import tariffs on gold is fading... the drop in oil prices is benefiting India's economy, leading to an improved growth outlook, lower inflation, as well as healthier fiscal accounts and balance of payments," he added.
STANDBY MODE; EYES ON BUDGET A dealer said that, "due to the impending budget buyers are currently in standby mode."
A banker concurred that all eyes are on the budget.
A second banker agreed, "traders are now awaiting for the budget to announce a reduction in duty."
The average price paid for physical gold in India, over the London spot price, was heard down slightly Thursday from Wednesday at $1.50/oz India-wide, with demand reported as slack by the bulk of local sources.
Demand in India so far this year has been markedly subdued, sources said.
"There is not much demand as buyers are expecting a duty cut in the budget," said a source.
A discount of $4.50/oz was heard at some points in January.
One dealer in Delhi said Wednesday it was "very difficult to say what the government will do. The cut could be anywhere between 2%-4%."
He noted that "there is not much demand."
Since the start of 2015 all discussions have been focused on the budget.
The premium or discount paid in India had been closely correlated with the international price so far this year, with the widest discount seen when the spot price hit an intraday year-to-date high of $1,307.98/oz January 22.
The spot low was $1,167.78/oz January 2, the first trading day of the year.
The London Bullion Market Association Gold Price settled Wednesday morning at $1,217.75/oz.
The average price of gold in January rose 4.1% month on month to $1,251.85/oz, the second consecutive monthly increase, the LBMA said last week.
Indian gold premiums/discounts are a barometer of the country's physical demand and are priced off the London spot price.
Local supply and demand, as well as the prevailing rupee/dollar exchange rate, help determine the price paid locally.
--Ben Kilbey, firstname.lastname@example.org
--Edited by James Leech, email@example.com