Reserve Bank of India recently announced easing of import restrictions on gold – a move that is likely to spur the demand of gold. The outgoing government had put these restrictions in place to rein in rising budget deficit and to stem the declining value of the rupee. However, these restrictions were not helping the cause for which they were put in place as gold was being illegally smuggled into the country.
Lifting of Sanctions on Gold
With the arrival of new the Indian government, it was expected that trade restrictions on import of gold would be removed. The latest move now allows approved trading companies to import gold and sell them to local jewelers. In addition, government has also allowed private banks to provide loans to the local jewelers in order to help them purchase gold. These measures by the government are expected to fulfill peak demand of gold during the upcoming Hindu festival months and wedding season.
Gold is synonymous to wealth and status in India. People in India spend 50 times more on Gold jewelry as compared to most Americans. Each year around 10 million weddings take place in which 30% – 50% of the expense relates to gold. There is also a surge in demand of gold during various religious festivals throughout India.
The latest easing of restrictions in gold trade is predicted to push the demand of gold even higher. It is expected that gold imports will double this year as compared to the previous year when 825 metric tons of the shiny metal where imported in India.
Impact on Gold Demand
Imports will not pick up until June with the onset of a number of important religious festivals that runs from August to October. Even then, such import restrictions may not be enough to change the trajectory of gold.
A number of gold trade restrictions are in place as 15% tax on import and 80/20 rule that discourage traders from importing gold in large quantities. The 80/20 rule states that 20% of the imported gold should be re-exported before taking on the next shipment.
If these restrictions are also removed than we can see a dramatic rise in the demand of gold from India, which in recent years is the second biggest importer of Gold after China. The current trade easing will not affect demand or price of gold by much.