Gold discounts in India have widened to a record of more than $200 an ounce on Wednesday, as a surge in prices after the import duty hike triggered investor selling in an already weak demand environment. According to Reuters, dealers in India offered discounts of up to $207 an ounce over official domestic prices on Wednesday, inclusive of 15% import and 3% sales levies, up from the $17 an ounce on Tuesday. As per a bullion division head of a Mumbai-based private bank with over two decades of trading experience, "discount levels were crazy in the physical market. We were double-checking prices before executing deals."
A hike in gold import duty from 6% to 15% is expected to push up retail prices, making it harder for middle-class shoppers and first-time buyers to make purchases. According to industry executives, discretionary buying is likely to take a hit in the short term, with some consumers choosing to wait for prices to stabilise before spending. Suvankar Sen, MD and CEO at Senco Gold, noted that an increase in import duty on gold typically has a direct impact on retail prices, which can influence short-term consumer sentiment, especially for price-sensitive buyers. The price sensitivity of buyers, especially those on tighter budgets, is a genuine concern for the industry.
Industry leaders across major jewellery chains anticipate a volume degrowth of 10-15% in the immediate phase, as reported by Senco Gold. MP Ahammad, chairman at Malabar Group, noted that first-time buyers will take a moment to recalibrate, and that exchanging old gold for new jewellery, which already accounts for a significant share of transactions at organised retailers, will become the dominant mode of purchase going forward. To ease the burden on buyers, several retailers are pushing exchange programmes that allow customers to swap old, unused, or broken jewellery for new pieces. However, retail buyers and jewellers are staying on the sidelines, increasing selling pressure and pushing discounts to unusually high levels, according to Reuters.
The government's import duty hike on gold and silver has created additional market impacts beyond physical prices. As per financial expert Kunal Kumar, gold and silver ETFs and mutual funds are directly affected as these investment vehicles invest in physical gold and silver, with their Net Asset Values (NAV) linked to MCX prices that already include customs and import duties. This means that when import duty increases, the value of these holdings can move higher, creating additional cost pressures for investors in these products. The same mechanism applies to jewellery prices, which are connected to IBJA rates that follow MCX prices, making higher MCX prices translate directly to increased jewellery costs.
Bullion dealers have expressed concern that the latest duty hike could boost smuggling, as it widened margins for grey-market operators to about 18%, from around 9%. As per a Chennai-based bullion dealer, grey market operators smuggle gold from overseas and sell it for cash to avoid duties, allowing them to offer it at discounts to market prices by evading taxes. This represents a significant increase in smuggling potential, as the duty hike creates substantial profit margins for illegal operators who can undercut legitimate dealers.
Gold prices have risen for the second consecutive day following the import duty hike, with 24K gold reaching near ₹1,62,000 per 10 grams across major cities, according to News18. Spot gold is currently trading at $4,725.39 per ounce, reflecting the continued market volatility. The government's decision to increase import duty from the previous 6% to 15% in 2024, after reducing it from 15% in 2024, signals a clear intention to cool down gold demand amid broader economic challenges including higher crude oil prices, a weak rupee, rising current account deficit, West Asia uncertainty, and pressure on forex reserves.
