Report flags potential impact on bullion trade and current account deficit as higher import duty reshapes gold market dynamics
The recent hike in customs duty on gold imports to 15 per cent is expected to push up domestic gold prices, influence trading patterns in the bullion market, and potentially weigh on India’s current account deficit (CAD), according to a report by SBI Research.
The report said higher import duties on gold have historically led to unintended market distortions, including the diversion of physical supplies through unofficial routes. “The decision to increase duty on gold imports has been taken on numerous occasions in the past. However, imposition of duty has its consequences in diverting the physical supply to grey channels,” the report said.
It added that the widening difference between global and domestic gold prices after a duty increase creates scope for arbitrage activity. “This is driven by higher spread between the offshore and onshore price of gold, which creates opportunity for arbitrage,” the report added.
SBI Research also pointed out that the government had sharply reduced the duty on gold imports before the latest increase. “Also, it should be kept in mind that duty on gold was reduced by more than half to 6 per cent in June 2024 till the current rise to 15 per cent,” the report stated.
The report observed that previous hikes in gold import duties were often accompanied by a rise in seizures by enforcement agencies, indicating a possible increase in smuggling activity.
On the external sector, SBI Research said gold imports remain a concern for India’s current account position. “The impact of gold on the Current Account Deficit (CAD) is a matter of concern,” the report said.
However, it clarified that fluctuations in the CAD cannot be linked entirely to gold imports alone. The report noted that there is no definitive trend showing that changes in the current account balance have been solely driven by gold imports, although recent estimates indicate the metal continues to have a sizeable impact.
The analysis further showed that even as import volumes have declined in recent years, the overall value of gold imports has risen sharply because of elevated prices. The gold import bill is projected to increase from USD 57.9 billion in FY25 to USD 72.4 billion in FY26.
Meanwhile, import volumes have continued to decline since FY24, falling by around 5 per cent in both FY25 and FY26.
Looking ahead, SBI Research expects the latest duty hike to result in some moderation in import volumes, similar to trends seen after earlier increases. “We expect that the current hike in duty may see similar trends as seen in past. However, we also feel that given the strong negative volume effect seen in recent two years, there will be some downward adjustment in volumes, the extent of which is, however, uncertain,” the report added.
