The Government of India has on gold and silver from around 6% to 15% (10% Basic Customs Duty + 5% AIDC). Since India imports most of its gold and silver requirements, this directly increases the landed cost of bullion in the domestic market.
The rise in the import duty on gold and silver immediately impacted on MCX gold and silver prices. MCX prices usually rise sharply because imported bullion becomes costlier, domestic prices start trading at a bigger premium over international COMEX/LBMA prices and futures contracts on MCX quickly adjust to reflect the higher import cost.
Today’s reaction itself showed that MCX gold futures surged more than 6–7% while silver futures jumped around 6–8% after the announcement.
MCX pricing formula roughly works like: International Price + USD/INR + Import Duty + Taxes + Premium so even if COMEX gold remains stable, a customs duty hike alone could push MCX prices higher.
Strong domestic premium, short covering rally and arbitrage widening between MCX and COMEX.
On the other hand, profit booking can emerge and demand destruction may happen at higher prices, jewellers may reduce purchases and physical premiums can cool down later.
Higher customs duty can reduce official bullion imports, and this may support the Indian rupee and current account deficit.
However, slow jewellery demand may increase chances of smuggling.
(Disclaimer: The article has been authored by Nirpendra Yadav, Sr. Commodity Research Analyst at Bonanza. Views expressed are personal.)