Gold, silver ETFs up 7% on import duty hike; here's what analysts suggest

Gold and silver exchange traded funds (ETFs) were trading sharply higher on Wednesday, May 13, after the government raised import duties on gold and silver to 15 per cent from 6 per cent. This comes after Prime Minister Narendra Modi urged citizzens to avoid buying gold for non-essential purposes for a year amid economic stress due to the US-Iran war and pressure on foreign exchange reserves. 

 

The government imposed a 10 per cent basic customs duty along with a 5 per cent Agriculture Infrastructure and Development Cess (AIDC), aiming to curb imports of the previous metals, narrow the trade deficit and support the rupee, which hit an all-time low of 95.75 per dollar. 

 

 

By around 10:10 AM, gold ETFs such as Union Gold ETF, Axis Gold ETF, HSBC Gold ETF, Kotak Gold ETF, Tata Gold ETF, Nippon India ETF Gold BeES, Groww Gold ETF, ICICI Prudential Gold ETF, DSP Gold ETF, Bandhan Gold ETF, and Edelweiss Gold ETF surged in the range of 4 to 6.5 per cent.

 

Among silver ETFs, DSP Silver, SBI Silver, UTI Silver, Kotak Silver, HDFC Silver, ICICI Prudential Silver, Groww Silver, Axis Silver, Mirae Asset Silver, Nippon India Silver, Edelweiss Silver, and Tata Silver ETFs rose in the range of 5 to 6 per cent. 

 

Gold futures for June delivery edged higher to ₹1,62,621 per 10 gram, up 6 per cent from the previous close of ₹1,53,442 per 10 gram on the Multi Commodity Exchange of India (MCX) during the morning session, while silver futures for July delivery rose 6.6 per cent to ₹2,97,499 per kilogram.

 

Hareesh V Nair, head of commodity research at Geojit Investments, said, on a temporary basis, we expect a mild decline in demand due to the duty hike, but on a broad basis, it is unlikely to impact the demand outlook over a longer period. 

 

"While there should definitely be a short-term impact, we expect demand to improve over time, similar to what we saw a few years ago when duty was at 15 per cent. Investors need not worry as prices are moving up and there is no sharp decline in sight. There is no need for panic selling; instead, they should continue to buy on a gradual and systematic basis. This environment is actually strengthening our market," he said.

  Notably, India is the world's second-largest consumer of gold and largest consumer of silver, relies heavily on imports to meet domestic demand. According to the World Gold Council, inflows into India’s gold exchange-traded funds (ETFs) jumped 186 per cent year-on-year in the March quarter to a record 20 metric tonnes. 

Sumit Singhania, research head at Bajaj Broking, said the measure is aimed at curbing precious metal imports and reducing pressure on the country’s foreign exchange reserves. Higher duties are expected to reduce precious metal imports, support the rupee, and help narrow the trade deficit.

 

According to Singhania, jewellery companies such as Titan Company, Kalyan Jewellers, and Sky Gold & Diamonds may face pressure as higher tariffs increase domestic gold prices and could weaken consumer demand, particularly for discretionary purchases like coins, medallions, jewellery, etc.

 

On the positive side, he said, gold financing firms, including Muthoot Finance and Manappuram Finance, are likely to benefit from higher collateral values of gold loans.  ==================  Disclaimer: View and outlook shared belong to the respective brokerages/analysts and are not endorsed by Business Standard. Readers' discretion is advised.