Gold Demand May Decline 10% Following Duty Hike: Indian Bullion Jewellers' Association

India's Government Raises Import Duties on Precious Metals

The Indian government's decision to increase customs duties on silver, gold, and other precious metals is expected to lead to a 10 percent drop in demand this fiscal year, according to the India Bullion and Jewellers Association (IBJA). The Centre raised the import duties on these metals to 15 percent from 6 percent on May 12, with the revised structure taking effect on May 13.

The new structure includes a 10 percent basic customs duty and a 5 percent Agriculture Infrastructure and Development Cess (AIDC). The IBJA estimates that the jewellery business could decline by 5-7 percent, while overall demand may fall by nearly 10 percent.

This move by the Centre aims to ease pressure on foreign exchange reserves and curb inbound shipments amid a rising import bill and Iran war-related pressure. The decision comes two days after Prime Minister Narendra Modi called for austerity.

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However, the IBJA fears that the decision could encourage smuggling, as illegal import becomes possible, which will help non-genuine businessmen. Discounts on gold purchases will remain higher in the market.

The import curbs may shore up the rupee and forex reserves, but people may opt for gold loans against jewellery to cope with inflation. Gold accounts for 9 percent of India's imports, and commodity experts estimate that the rise in import duties will increase the landed cost of bullion.

Impact on MCX Gold and Silver Prices

The rise in the import duty will have an immediate impact on gold and silver prices on the Multi-Commodity Exchange (MCX). On May 13, MCX gold futures for June delivery jumped 6.03 percent to Rs 1,62,700 for 10 grams. July silver futures gained 6.43 percent to Rs 2,97,013 a kilogram.

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The increase in import duties will lead to a higher landed cost of bullion, which will push domestic bullion prices further, weigh on jewellery stocks, and soften consumer demand. Even if Comex gold remains stable, a customs duty hike can push MCX prices higher.

Short- to Medium-Term Impact

In the short term, a duty hike could lead to a strong domestic premium, a short-covering rally, and wider arbitrage between MCX and Comex. However, soaring prices can lead to profit-taking and demand destruction. Jewellers may reduce purchases, and physical premiums may cool later.

In the medium term, higher duties can reduce official bullion imports, thereby supporting the rupee and the current account deficit. However, slow jewellery demand may increase the chances of smuggling.

According to the World Gold Council, every 1 percent rise in import duty reduces consumer gold demand by approximately 6.4 tonnes. A cumulative 9-percentage-point hike could suppress annual demand by 57 tonnes. Higher import duties could also revive gold smuggling, which had eased substantially after the 2024 duty reduction.