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Gold Duty Hike May Spike Prices, Boost Grey Market: SBI Report

SBI Research warns that the recent increase in customs duty on gold imports to 15% could push up domestic gold prices and alter physical market dynamics. The report highlights a possible diversion of supplies through unofficial channels due to arbitrage opportunities. It notes that while gold import volumes have been declining, the overall import bill has risen sharply due to higher prices. The report expects some moderation in import volumes following the latest duty hike, but the extent remains uncertain.

Key Points: Gold Duty Hike to Raise Prices, Boost Grey Market

  • 15% gold import duty hike may raise domestic prices
  • Diversion of supplies to grey markets likely
  • Gold imports impact current account deficit
  • Import volumes expected to moderate after duty hike
3 min read

Gold duty hike may raise domestic prices, divert supplies to grey markets: SBI report

SBI report warns 15% gold import duty hike may raise domestic prices, divert supplies to grey markets, and impact India's current account deficit.

"The decision to increase duty on gold imports has been taken on numerous occasions in the past. However, imposition of duty has its consequences in diverting the physical supply to grey channels. - SBI Research"

New Delhi, May 14

The recent increase in customs duty on gold imports to 15 per cent could push up domestic gold prices, alter physical market dynamics and have implications for India's current account deficit, according to a report by SBI Research.

The report said the import duty increase is likely to have a ripple effect across the bullion market, including a possible diversion of supplies through unofficial channels.

"The decision to increase duty on gold imports has been taken on numerous occasions in the past. However, imposition of duty has its consequences in diverting the physical supply to grey channels," the report said.

According to the report, the widening gap between international and domestic gold prices after a duty increase creates opportunities for arbitrage.

"This is driven by higher spread between the offshore and onshore price of gold, which creates opportunity for arbitrage," it added.

SBI Research noted that the duty on gold had earlier been reduced sharply. "Also, it should be kept in mind that duty on gold was reduced by more than half to 6% in June 2024 till the current rise to 15%," the report stated.

The report further said that higher import duties have historically led to a rise in seizures by enforcement agencies. On the external sector, SBI Research highlighted that gold imports continue to remain a matter of concern for the current account deficit.

"The impact of gold on the Current Account Deficit (CAD) is a matter of concern," the report said.

However, the report clarified that gold imports alone have not been the sole driver of CAD trends over the years. There is no clear trend that CAD developments have been driven by gold, it said, while adding that projections based on recent trends show a significant impact of gold imports on CAD.

The report also pointed out that while gold import volumes have been declining, the overall import bill has risen sharply due to higher prices. The trends in value show a sharp rise from USD 57.9 billion in FY25 to USD 72.4 billion in FY26. At the same time, in volume terms, the gold imports have shown a decreasing trend since FY24, reducing by approximately 5 per cent in FY25 and FY26.

Looking ahead, SBI Research expects some moderation in import volumes following the latest duty hike.

"We expect that current hike in duty may see similar trends as seen in past. However, we also feel that given the strong negative volume effect seen in recent two years, there will be some downward adjustment in volumes, the extent of which is however uncertain," the report added.

- ANI

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Reader Comments

J
James A
Interesting analysis from SBI. The arbitrage between offshore and onshore prices is the key issue. In my country, we have similar problems with parallel markets when tax differentials get too high. India's CAD is definitely a concern - gold was almost $73 billion last year. But draconian measures have side effects.
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Priya S
Bhai, the SBI report is spot on about grey markets. I live in Kerala and we see how smuggled gold comes through the airports. The duty jump from 6% to 15% in less than a year is crazy. My jeweller told me yesterday that unofficial premiums are already rising. But honestly, our love for gold is not going anywhere.... 😅
M
Michael C
Respectfully, this seems like a policy that hurts the poor and middle class the most. Rural women who buy gold as savings get disproportionately affected. Why not focus on better compliance instead of hiking duties? The report mentions declining volumes - that's a sign people are being pushed to informal channels.
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Rajesh Q
As a small jeweller in Chandni Chowk, let me tell you - this duty hike is not going to reduce demand. Indians will pay premium because gold is part of our culture. But where will they buy? Some will come to us, some will go to the 'other' market. The government should learn from past mistakes and think of alternatives like sovereign gold bonds.
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Suresh O
I appreciate the SBI research team's analysis. But the government needs a balanced approach - yes, CAD is a concern, but using duty hikes as the only tool is counterproductive. Why not improve the gold monetization scheme and

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