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In an attempt to stem the steep decline in rupee and curb the widening trade deficit, which has soared to record highs of $23.33 bln in May amid rising import bills, the government has raised the import duty on gold by 5% in a surprise move, which makes the import duty on gold as 12.50%, while the effective duty on gold will be 15%, including the 2.5% Agri Cess, as social welfare surcharge of 0.75% has been exempted. In all, the net duty change will be 4.25%. Gold also attracts additional 3% GST as well, which means the total levies on gold will be 18.45%. 

Considering the fact that we largely import gold to meet domestic demand, this is likely to lead to a proportionate rise in the price of domestic gold by around Rs.2000 per 10gm, factoring in international gold prices which are trading with a slightly negative bias. With domestic prices surging, demand is likely to take a hit at a time when the country is already grappling with high inflation.

Our total imports jumped by around 56% in May (YoY) amid surging costs of energy products, whereas gold imports which is a non-essential commodity rose by 677% from a year ago to $5.83 bln, the highest level in a year. Gold demand has seen a strong pick up amid a decline in prices, where they are seen consolidating around Rs.50000/10gm mark.

Besides, crude prices which have risen by around 50% this year amid the supply squeeze caused by the Russia-Ukraine war are already widening the CAD and putting pressure on the Indian rupee which has slumped to record lows of 79.13 mark. As per the estimates, India's current account deficit is expected to widen to 2.9% of GDP for the current fiscal, as compared to 1.2% in FY 22.

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