Hike in gold import duty to impact imports, rupee: Experts

Excerpts from Midcap Radar on CNBC-TV18 Watch the full show »

With the government raising the import duty on gold to 2% from Rs 300 per 10gm, experts tell CNBC-TV18 that the physical import of gold is likely to get impacted. "This is going to hurt demand on the import side in India," said Naveen Mathur of Angel Broking.

Imports of the precious metal will now get expensive by approximately Rs 650 per 10gm due to this hike, he added.

Kishore Narne of Anand Rathi Commodities says that this will majorly impact India's trade deficit and the rupee. "If you remove gold from India's trade deficit, you will have a significant difference; probably a surplus also in some months," he said. Therefore, he believes the government is trying to discourage imports.

He goes on to say that this move could strengthen the rupee against the dollar. "We might look for anything close to 50.50 per dollar kind of levels in the next couple of days," he said.

Below is an edited transcript of his interview with Gautam Broker and Latha Venkatesh. Also watch the accompanying video.

Q: The gold import duty has been raised to 2% from a static Rs 300 per 10 grams. How much does that mean in terms of an increase and how expensive will imported gold become?

Mathur: The market has a taken a stance from the point of view where we are talking about the gold import duty and it's been static at Rs 300 for the last couple of years or so. This particular impact of making it 2% now would definitely impact to the imports on the physical side for the gold in India.

Q: How much more does it become? If I just go by the 10 gram cost, 3% of Rs 27800 or thereabouts, is that how we should be calculating?

Mathur: On Rs 28,000 kind of a value today for 10 gram, it's approximately Rs 800 or so for 3%. For 2% it would be around Rs 600 or so. So total in all Rs 650 plus on the gold import for 10 grams is going to impact the physical demand largely.

The depreciation in the rupee was holding gold prices inspite of the downtrend in the international market in dollar terms, the prices still have remained on the upside. It's going to hurt the demand on the import definitely in India.

Q: We had prices go to USD 1900 an ounce. At that point did you actually see a softening in demand? The point I am trying to get across is if the price is Rs 28,500 will the user restrained himself from buying gold?

Mathur: Yes that's right. High prices definitely impact the import and particularly the physical demand in terms of the jewelry, which Indian's buy for gold. But then if you see the consequent investment demand, that has gone up very largely. If you see the assets under management (AUM) of the gold ETFs, they have gone largely from Rs 1000 crore to around Rs 10,000 crore worth of an AUM for the gold ETF combined together. So investment demand has definitely gone up, which has created some kind of a positivity on the total imports of gold.

But definitely in terms of the jewellery it has impacted. But one thing Indians have taken into account is that gold prices are going to remain the way they are today. You don't see gold around Rs 20,000-22,000; those days have gone by and we feel that the market maybe consolidating at around Rs 26,000 on the downside.

Q: When you invest in gold, does that have to be marked in terms of physical delivery? If somebody is investing in gold in the Indian market just in terms of investment at the back of it does the company actually have to keep a physical inventory of it?

Mathur: There are different ways to invest in gold in India. You have ETFs, you have the physical buying through the online spot exchange which is the National Spot Exchange and then you also have the jewellery, the bar's and coins.

Through ETFs, you have to have underlying physical. If you are buying ETFs the underlying gold has to be bought in and has to be kept.

Q: How would you asses the impact of this announcement?

Narne: We are seeing already the impact on the market. If you see government finances, our total trade deficit number, if you remove gold from that you will have a significant difference. Probably you might have a surplus also in some months. So, I think that is one thing which is hurting the rupee also on the macro front. So I think government wants to slightly discourage the imports.

Q: How would you trade gold now or is it now already factored in?

Narne: I don't think you can do much about this news because it's already factored in; for the last half an hour or so it's factored into the market. But again, just from the trading angle, that doesn't really make any sense because from here it is perpetually inbuilt into the prices anyway. As the price moves up because it's a percentage duty rather than fixed duty, it increases the government revenue. Also, the cost factor in the gold also increases as the price goes up, so that is one factor. But otherwise, as of now, the trading opportunity is not really that great.

Q: You would go more bullish on the rupee because of this announcement?

Narne: I think probably we might look for anything close to 50.50 kind of levels in the next couple of days.