India easing gold import restrictions: Curb your enthusiasm
Long the top importer of gold, India fell behind China in 2013.
The decline in gold consumption came after bullion import duties were pushed up tenfold – from 1% at the start of 2012 to 10% – and other rules such as mandatory re-export of 20% of imports, transaction taxes and even curbs on ETF buying stymied India's gold industry.
Business-friendly prime minister elect Narendra Modi's sweeping victory has raised hopes inside the country that promises of relief for the gold industry that employs more than 3 million traders and shopworkers would be kept.
Last week gold was boosted by news that the Reserve Bank of India is relaxing the much-maligned 80-20 import-export measure.
Hopes that the measure could be fully phased out by October, ahead of the Diwali festival in October and the crucial gold-buying wedding season, has already seen the rupee price of gold drop to nine-month lows.
"It’s only a matter of time before these restrictions on gold are removed completely by the new Indian government,” Marcus Grubb, managing director of investment strategy at the World Gold Council told the Telegraph.
Gradually, a number of things are now adding up to make investors more positive about gold."
Despite the curbs overall Indian consumption still rose by more than 100 tonnes to 975 tonnes in 2013 according to the WGC data while some estimates put "unofficial imports" at more than 100 tonnes.
But the first quarter this year the restrictions really began to bite with gold demand on the subcontinent plummeting during the first quarter.
Jewellery consumption in India declined 9% to 145.6 tonnes, while India's bars and coins buying showed a huge drop-off of 54% to 98 tonnes.
Overall gold demand in India slid 26% during the first three months of 2014.
WGC says "as demand for physical gold investment products fell back, the pressures that had been squeezing the supply chain throughout 2013 eased," pushing down price premiums in a number of local markets.
Premiums paid over the London price rocketed to as much as $170 an ounce during the gold festivals and wedding season last year.
It has since come down but last week premiums demanded by India's gold traders still hovered around $60 above the international ruling price.
That compares to Shanghai premiums that topped out at $37 an ounce a year ago, but which has since fallen to par or even a discount.
India imposed the import restriction to shore up the value of the rupee and cut down on the country's crippling current account deficit.
Bullion and crude oil contributed almost 80% of the record $88 billion deficit in the past fiscal year.
Those problems have eased, but have certainly not gone away.
The relatively muted reaction on New York and London gold markets – briefly scaling $1,300 on Thursday only to fall back to $1,292 the next session – to the prospects of greater India imports could indicate that the changes may not be the positive catalyst gold investors have been hoping for.
Easing the curbs should result in declining premiums inside the country and a reduction in smuggling, but may not alter underlying demand that much.
Gains in the rupee to 11-month highs following the Modi win have also already been pared back. Naveen Mathur, associate director (commodities and currencies), Angel Broking told India's Business Standard over the weekend:
"There is no positive trigger for prices in the domestic market; also, the rupee will continue to remain the major deciding factor for the yellow metal."
Last month Rajesh Khosla, managing director of the country’s biggest refiner which is expanding capacity to 200 tonnes of gold per year, predicted the relaxation of the 80-20 rule, but added that "while the form of restrictions may change, the government will continue to restrain buying."
That means the limits would result in shipments of 650–700 tonnes for the 12 months started April 1, close to last year's levels and down from 845 tonnes in 2012–2013 according to finance ministry figures.
Image by Edson Walker