India’s overseas gold purchases are likely to hit a more than two-year low in February, as rising prices and hopes for a cut in import taxes keep buyers away, industry sources said.
While lower purchases by the world’s second-biggest consumer could dent the current rally in global bullion prices, it would mean relief for the Indian government which has been struggling to curb gold imports that cost the country $36bn in 2015.
India’s imports of the metal are expected to drop to 25 tonnes in February, according to a median of estimates from five industry participants, including bank dealers and traders. That would be about 67% below month-ago levels and the lowest since September 2013, when arrivals were hit by a government mandate to export a fifth of all gold imports.
“Banks and trading agencies have scaled down imports. They are being forced to offer heavy discounts (to global prices) to clear inventory,” said Bachhraj Bamalwa, director at All India Gems and Jewellery Trade Federation, pointing to weak demand.
Global spot gold prices hit a one-year peak of $1,260.60 an ounce this month amid volatile financial markets, and are currently at $1,216. Prices have risen 15% over two months, their biggest such rally since August 2011.
Dealers in India are offering record high discounts of up to $50 an ounce to the spot benchmark to lure buyers, but there are no takers, the industry participants said.
Jewellers and retail consumers are delaying purchases in the hope prices will correct and that India will cut its import duty by 4 percentage points in this month’s budget, said Sudheesh Nambiath, a senior analyst at consultancy Thomson Reuters GFMS.
India imposed a record high duty of 10% in 2013, but instead of curbing imports, the duty revived smuggling networks that brought an estimated 175 tonnes of gold into India in 2014 – or about a fifth of total annual arrivals. Industry groups, which have been urging a tax cut, are now eyeing the 2016-17 Indian budget on February 29 to see if any reduction will come through.
Domestic gold prices swung into deep discounts before the previous budget as well, but the government surprised the market with no cut in duty.  Given the uncertainty on taxes and prices, India’s purchases this month will mainly be in the form of “dore”, an alloy of gold and silver that is refined to get pure gold, Nambiath said.  India charges a lower import duty on dore than pure gold.
Dore purchases, together with rising supply of scrap as people sell coins and bars bought when gold was cheaper, are further cutting India’s need for pure gold imports.
Already, rural gold demand, which accounts for about two-thirds of India’s total consumption of the metal, has suffered a setback as the first back-to-back drought in nearly three decades has crimped farming incomes in the country.
“Consumers are not sure about price trends. They are waiting for prices to stabilize before making purchases,” said Bamalwa.