Gold Prices Hold Ground in Domestic Market Amid Global Rally, Despite Import Duty Hike

Gold Prices Mirror International Trends Amid Geopolitical Tensions

Nearly three weeks after the Centre raised customs duty on gold to 15 percent from 6 percent on May 13, domestic gold prices have continued to broadly mirror international trends. Industry experts attribute this to geopolitical tensions in the Middle East, which have driven the bullion rally globally.

According to Dr. Renisha Chainani, Head of Research at Augmont, only part of the increase has so far been reflected in local prices. This is due to weak demand, inventory liquidation, and rising recycled supply, which have cushioned the impact of the duty hike.

Gold prices have remained elevated globally amid heightened uncertainty following the escalation of the conflict in Iran. As India imports the bulk of its gold requirements, domestic prices continue to take cues from international benchmarks such as COMEX and London spot gold. Dr. Chainani notes that domestic gold continues to track international benchmarks directionally, with COMEX and LBMA still determining the underlying trend.

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The government raised the import duty on gold to 15 percent from 6 percent amid a weakening rupee, elevated crude oil prices, and geopolitical tensions. This move was intended to reduce gold imports and protect the country's foreign exchange reserves.

According to Dr. Chainani, only a fraction of the duty hike has been passed on to consumers so far. Instead, domestic prices now trade at a steep discount to the official landed price, which has widened sharply from an average of around $14 per ounce before the duty increase to nearly $150 per ounce after the hike.

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The analyst says several factors have prevented the duty hike from being fully passed on to consumers. The increase coincided with a seasonally weak period for jewellery demand after the peak wedding season, while the traditional inauspicious period between mid-May and mid-June further weighed on purchases. The sharp rise in prices also encouraged investors to book profits and prompted dealers to release inventories imported at lower duty rates.

Demand data reflects the slowdown. According to industry estimates cited by the Indian Bullion and Jewellers Association (IBJA), fortnightly gold demand has dropped to roughly 7.5 tonnes, down from around 25 tonnes during the same period last year. This is a significant decline, with earlier estimates suggesting that the jewellery business could decline by 5–7 percent, while overall demand may fall by nearly 10 percent.

Nirpendra Yadav, Senior Commodity Research Analyst at Bonanza, notes that customs duty is only one of the factors influencing domestic gold prices. The increase in customs duty raises the landed cost of imported gold and generally creates a premium over international prices. However, Indian gold prices do not move solely due to changes in duty; they continue to closely track global benchmarks because India imports most of its gold requirements.

Apart from international gold prices, domestic bullion rates are influenced by the rupee-dollar exchange rate and local taxes. A stronger rupee can partially offset the impact of higher import duties, while a weaker rupee amplifies the impact of higher duties and global gold prices. Weakening jewellery demand, lower inventory accumulation by jewellers, and increased recycling activity have also moderated the impact of the duty increase on retail prices.

Experts believe that for now, domestic gold will continue to be driven by global developments, particularly geopolitical risks, expectations around US interest rates, and movements in the dollar.