Gold Miner Stocks Surge Following Government's Decision to Increase Import Duty on Precious Metals

Government Hikes Import Duty on Gold and Silver, Boosting Gold Financier Stocks

The government's decision to increase the import duty on gold and silver from 5% to 15% has sent gold financier stocks soaring, with major players like Manappuram Finance, Muthoot Finance, and IIFL Finance jumping 4-5% on Wednesday.

The move, which came into effect on 13 May, has resulted in a sharp jump in gold and silver prices, with gold June futures on the Multi Commodity Exchange (MCX) surging 6% and silver July futures vaulting 7%. The government's aim is to curb precious metal imports, narrow the trade deficit, and support the rupee.

The increased import duties, comprising a basic customs duty of 10% and the Agriculture Infrastructure and Development Cess (AIDC) of 5%, have created a robust floor for domestic prices, preventing any significant downward slide. According to experts, the higher tax structure is likely to dampen immediate retail demand and jewellery volumes by 10-15%.

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The jump in gold prices has benefited gold financers, who provide retail loans with gold as collateral. When gold prices rise, the value of the pledged collateral with them rises too, creating a favourable environment for demand. Additionally, an increase in gold prices offers an opportunity to borrowers to access a higher loan amount without pledging additional gold.

Gold loan companies' revenue and profitability depend on the gold price. When the gold price rises, they can lend more for the same quantity of gold since the Loan to Value (LTV) is decided by the Reserve Bank of India (RBI). Therefore, the increase in gold price consequent to the hike in customs duty is beneficial to gold loan companies, leading to an increase in their revenue and profits.

Experts believe that the rally in gold financiers is largely driven by the surge in domestic gold prices after the government raised import duty to 15%. Higher gold prices increase the value of collateral pledged with gold loan Non-Banking Financial Companies (NBFCs), improving loan-to-value dynamics and expanding their lending capacity. The market is also factoring in stronger demand for gold-backed loans from households and Micro, Small and Medium Enterprises (MSMEs) amid tighter liquidity conditions.

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