- Another Curveball for Indian Gold Demand
- After loosening some of the restrictions on gold imports in May, the Indian government may re-tighten amid a strong resurgence in gold import demand.
The Finance Ministry and central bank met today to discuss, but will reconvene in a few days after failing to come to a decision.
- We believe the short-term impact of the discussions will be for consumers increase purchases before any tightening takes place. Historically, tighter restrictions have led to the price of gold being substantially higher in India than elsewhere.
- Higher premiums that could follow a potential tightening of restrictions will however dampen demand going forward, reducing come of the support for the gold price in 2015.
Today, the Indian Finance Ministry and Reserve Bank of India (the central bank) met to discuss reintroducing some of the curbs on gold imports that were eased in May this year. Responding to a widening current account deficit the authorities introduced draconian restrictions on gold imports last year. The main feature of the restrictions – a rule that requires 20% of all imports to re-exported (the so-called “80-20” rule) remains intact. In May however, private trading firms were allowed to import the metal after being barred from doing so in July 2013. Imports of gold have risen substantially following the lift in the restriction.
In May, when the restrictions on private trading houses were lifted, the premium on Indian gold i.e. how much higher gold trades in India compared to the London fix fell from over US$260/oz to just over $140/oz today.
There is speculation that the restrictions on private trading firms will be re-introduced following the meeting between the Ministry of Finance and the RBI. We could see the premium rise once more and we believe that we could see increased buying of the metal as consumers try to get ahead of the move.
Over time however, tighter restrictions will curb imports and dampen sales in India, removing some of the support for global prices.
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