India raises gold import duty to cut current account deficit

India, the world’s largest gold buyer, increased a tax on bullion imports to curb a record current-account deficit at a time when the World Gold Council predicts record quarterly demand for the metal in the country.

The duty will rise to 8% from 6%, effective immediately, Revenue Secretary Sumit Bose said in a telephone interview today in New Delhi. Before today’s move, India had tripled the tax since January last year. Gold imports may fall as much as 20% this year, the All India Gems & Jewellery Trade Federation said. The levy on platinum imports was also increased to 8% from 6%.

Gold’s slump to a two-year low in April boosted demand for jewelry from Asia. Today’s step is the latest by India to reduce the appetite for the metal among the nation’s 1.2 billion population, for uses ranging from festival and wedding jewelry to a hedge against elevated consumer-price inflation. Such demand contributed to a $32.6 billion current-account gap in the last quarter of 2012, equivalent to a record 6.7% of gross domestic product.

“Physical demand at these sort of price levels is still very strong and the Indian government wants to curb imports,” Robin Bhar, an analyst at Societe Generale SA in London, said today by phone. “It will have an impact on demand because already we’re seeing a whole raft of restrictions announced.”

Gold for immediate delivery rose 0.4% to $1,404.60 an ounce in London and is down 16% in dollar terms this year, compared with a 13% in rupees. It reached a two- year low of $1,321.95 on April 16. Prices had rallied the past 12 years in the longest bull run in at least nine decades.

Indian Imports

India’s gold imports will be 300 to 400 metric tons in the second quarter, almost half of total shipments for all of last year, the London-based World Gold Council said in a May 29 report. Inward shipments may decline by as much as 20% in 2013 following the increased levy, Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation, said by telephone from Kolkata.

The rupee has weakened about 4.8% against the dollar in the past month, the most in a basket of 11 Asian currencies tracked by Bloomberg. The drop threatens to stoke price pressures that may curb the Reserve Bank of India’s scope to extend monetary easing and counter the slowest economic growth in a decade.

The government this week sold inflation-linked bonds for the first time in 15 years, aiming to provide investors with an alternative to gold as a buffer against inflation.

Wider Restrictions

Wholesale prices rose 4.9% in April from a year earlier, a 41-month low, while the consumer-inflation index climbed 9.4%.

The nation had already widened curbs on imports yesterday. Restrictions on overseas purchases by banks on a consignment basis will be expanded to include state-run trading companies and others authorized to directly import gold, the RBI said yesterday.

“The government is taking a hard line trying to curb the country’s appetite for gold,” UBS AG wrote today in a report, before the announcement. “This poses a risk for Indian gold demand up ahead. While this is unlikely to put an end to traditional gold buying in India, a more expensive gold price in rupee terms should have a negative impact on overall volumes. An unintended consequence of increasing difficulties in importing gold would be a potential increase in unofficial flows.”

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