Silver trades at steep premium as markets expect import duty hike in upcoming Budget

Silver surges to record highs

• India's silver imports rose 129% YoY to $7.77B from April to December.
• Rumors of import duty hike have driven silver prices to record premiums on MCX
• Jewellers call for probe into price manipulation and policy info leaks

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Silver prices have been on a tearaway rally, soaring multiple times over in the recent months. As demand for the metal has picked up, India’s import bill has climbed as well, since silver is largely imported. To cap imports, market participants are now expecting Finance Minister Nirmala Sitharaman to raise duties on silver in the upcoming Union Budget. This, in turn, has fuelled the rally further, with silver now trading at a steep premium.

In December, silver imports surged 79.7 percent month on month to $0.76 billion. For the April - December period, silver imports jumped nearly 129 percent year on year to $7.77 billion, compared to $3.39 billion during the same period last year, even after the festive season, which is when shipments typically peak.

In the previous budget, the Finance Minister slashed the import duty on silver to six percent, down from 12 percent earlier. This was done in an attempt to curb smuggling, and make the metal more attractive to domestic players. The six percent customs duty, coupled with three percent GST on silver, are used to arrive at silver's landed price: the total price that silver is bought and sold at.

However, with the rising demand, the imports of the metal have jumped substantially. Currently, there is no consensus on how much the hike will be. Bhavik Patel of Tradebulls Securities mentioned that at the current juncture, given the market dynamics, any increase in import duty could not be ruled out. "As a result, bullion dealers are charging premiums over the prices in anticipation of a hike," he said.

Nitin Kedia, National General Secretary of the All India Jewellers & Goldsmith Foundation (AIJGF) feared that it could rise to 15 percent. "There were rumors that the duty could go up by three to four percent, but some players, when the premium [in silver] was around 13 percent, started saying that the duty will be revised to 15 percent."

On January 21, silver futures on the MCX were trading at a significant premium to the spot prices: over Rs 40,000 compared to the landed cost. Given the sharp premiums, All India Jewellers & Goldsmith Foundation penned a letter to the Finance Ministry, requesting a thorough investigation into the supposed price manipulation.

"Silver is trading at an extraordinary premium of approximately [Rs] 40,000 on MCX versus the prevailing benchmark/spot-linked parity. This sharp and sudden dislocation is being widely attributed in the market to "rumours" of an impending import duty hike on Silver. If this rumour is true-or even partially true-it raises a grave concern that price-sensitive policy information may have been leaked before any formal announcement. Such leakage, if it occurred, would be a direct threat to market integrity," said the letter.

In a conversation with Moneycontrol, Kedia said, "The sharp moves in the price of silver, especially with the strong premium seen on the MCX lead us to believe that there will be a hike in duty seen in the Budget. However, if the government hikes the import duty to 15 percent, it will lead to duty arbitrage."

In fact, prior to writing to the Finance Ministry, AIJGF reached out to the Securities and Exchange Board of India (SEBI) to ask the regulator to investigate the abnormal movement of silver prices. The regulator has not yet responded to the Federation's queries.

The sharp premiums on the MCX has negatively impacted the jewellers' working capital. "As jewellers and bullion players, we usually hold physical inventory. To hedge this exposure, we sell positions on the exchange. But when the premium shoots up to Rs 40,000, it adds an extra burden on our working capital. At a time when silver prices have already tripled over the past seven to eight months, this becomes extremely difficult to manage," Kedia said.

However, no change in duty for gold looks likely, Kedia added, but perhaps some import restrictions. "The government would want to focus on domestic refining for gold; there's a lot of gold in India. However, there is unlikely to be much change in the customs duty on gold, as changes would make it difficult for the consumer to purchase gold."

Today, silver futures on the MCX have hit another fresh record high at Rs 3,39,927 per kilogram. However, will the rally continue unabated or if the Budget will cap the gains remains to be seen.

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