US rate hikes, strong dollar check Indian gold prices, offer relief to jewellers

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Pressure on international gold prices exerted by US inflation, consequent interest rate hikes and a strong dollar has apparently checked a rise in the price of the precious metal in India after a recent hike in its import duty, much to the relief of jewellers.

The import duty increase had not been expected by jewellers who were awaiting the implementation of a proposed e-way bill, which they reckon will have negative repercussions on gold trading.

Although the hike in the Goods and Services Tax (GST) on polished diamonds from 0.25% to 1.5% will raise the retail price of the stones, jewellers have welcomed it as the step will help reduce input tax credit (ITC) accumulation.

Gold prices have increased only slightly after the decision to raise the basic customs duty on gold from 7.5% to 12.5%. The effective duty on gold now stands at 15.75% including 3.25% agri cess and welfare charge. In addition, there is 3% GST.

The price of  22-carat gold, chiefly used in jewellery, rose from Rs 48,000 per 10 gm last Saturday, when the import duty hike announcement came, to Rs 48,100 on Tuesday. It dropped further to 46,850 per 10 gm on Thursday on reports hinting at a further in US interest rates hike.

“If rupee continues to fall, then the gold rates could increase. But if it strengthens against dollar, then there is scope for correction,’’ said Hareesh V, head of research and commodities, Geojit Financial Services. The rupee is currently at around 79.30 against dollar

In the international market, he said, gold is weak with the dollar remaining strong and the hike in interest rates by the US Federal Reserve.

“Gold will hover in the range between $1,950 and $1,650 per ounce in the short to medium term. There will be no major selling or rally unless the Russia-Ukraine war or (chances of) recession worsen,’’ he said.

Smuggling concerns 

Global gold rates hovered around $ 1,744 per ounce on Thursday. Last time, the price went above $2,000 was in March. From May onwards, rates have remained under $1,900.

A lower international gold price will be good for jewellers when the festival season arrives in the second half of the year. But they reckon the import duty rate hike will encourage more smuggling of gold into the country.

“At a time when the gold industry is getting more organised, duty hike will affect those who are doing legitimate business by increasing illegal trade. We hope this is a temporary measure and the government would roll back the hike when the balance of payment situation stabilises,’’ said Ashish Pethe, chairman of the All India Gem and Jewellery Domestic Council.

He said e-way bill notification for gold trade is yet to come although the Finance Ministry has given it in-principle sanction. The proposal is to make the e-way bill, which is an electronically generated bill about the details of shipment of goods, mandatory for the transport of gold and precious stones above a value of Rs 2 lakh. This is being considered to reduce tax evasion in gold.

“There are chances that Aadhar and other details could be leaked and it poses risk of life and burglary when traders are travelling with large quantities of gold,’’ Pethe pointed out.

Small jewellers hit by e-way bill 

Small jewellers, who make up the bulk of the trade, may have to bear the brunt of difficulties created by the e-way bill.

“Most of these jewellers depend on old gold rather than bullion to make jewellery and it involves several steps which will require them to transport gold to several places. And for each travel they have to make a separate e-way bill,” said B Govindan, president of the All Kerala Gold and Silver Merchants Association.

The association has appealed to the government to raise the limit of Rs 2 lakh for transport without an e-way bill. At the current gold rate, Rs 2 lakh will cover around 50 gms. Most small jewellers do a business of 50 to 100 gms a day.

And if gold prices move up, then the quantity that can be transported without e-way bill will be lower, Govindan said.

Export boost 

While gold jewellers are debating several issues, the diamond trade heaved a sigh of relief with the recent government announcement to raise GST on cut and polished diamonds from 0.25% to 1.5%.

Gem and Jewellery Export Promotion Council (GJEPC) has already hailed the decision, which will help reduce the input tax credit (ITC) accumulation of around Rs 600 crore in the diamond industry.

“The benefits will offset the impact of small increase in price and will give a boost to exports, which have been doing well this year. The laboratory-grown diamonds have become a big draw in the US,’’ said Mahesh Mangukia, a member of the Surat Jewellery Manufacturers Association.

India’s jewellery exports stood at $39.14 billion in FY22. Of this, over 60% was generated by cut and polished diamonds. The industry is expecting exports to exceed $40 billion in the current financial year.