In order to ease the pressure on the rupee, the Indian government announced on July 1 that it would increase the tariff on imported gold by 5 percentage points to 12.5%. However, there are concerns that higher import tariffs will spur a revival in commodity smuggling.
India’s worsening trade deficit
Faced with a widening trade deficit and devaluation of the local currency, the Indian government announced on July 1 that it would raise the tariff on imported gold from 7.5% to 12.5%. Indian precious metals prices jumped 3% immediately after the news.
according to a Report, Imports of the precious metal by India, the world’s second-largest consumer of gold, rose nearly tenfold in 12 months to $6 billion, the country’s latest figures show. During the same period (May 2021-May 2022), India’s trade deficit increased to $24.29 billion from $6.53 billion a year earlier.
Following the announcement, some Indian experts applauded the decision, saying it would dampen demand for the precious metal. However, an unnamed dealer was quoted in the report as saying the rate hike could encourage smuggling of goods. The dealer was quoted as saying:
Gold smuggling is falling due to COVID-19 restrictions after tax cuts [the] movement of people. But now it may rise again.
Meanwhile, another expert, Somasundaram PR, regional chief executive of the World Gold Council’s India business, agreed with experts that higher interest rates would help reduce demand for gold, thus easing pressure on the rupee. Surendra Mehta, secretary of the Indian Bullion and Jewellers Association (IBJA), predicted a rebound in demand for the precious metal in the same report.
The announcement by Narendra Modi’s government comes amid reports that the Indian rupee has violation Against the dollar for the first time above the 79 mark. At the time of writing, the rupee is trading at 79.09 against the US dollar.
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