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India’s gold-tariff hike may fail to boost rupee
MUMBAI (MarketWatch) — Uncertainty over currencies and high inflation are among the key factors often cited, if not celebrated, by gold investors to explain the spectacular rise of the precious metal in recent years, including its jump to record highs above $1,900 an ounce in 2011.
It seems the government of India, which just slapped its first import-duty increase on gold in two years, now also wants to benefit from those trends.
The idea: Using India’s position as the world’s largest consumer of gold to at least partly plug the gaping hole in the government’s finances and the nation’s current-account deficit, both cited as factors in last year’s slide in the rupee.
Between August and December, the rupee USDINR -0.30% slumped 18% to a record low, sending the U.S. dollar above 54 rupees, which in turn has fueled inflation pressures in India’s import-heavy economy.
This has complicated matters for the Reserve Bank of India, which this week left its high policy interest rates unchanged, even as the economy slows.
India’s fatal attraction?
Last week, the government said it would lift the import duty on gold to a flat 2%. That means having to pay the government about 520 rupees, or about $10, for 10 grams of gold imported, up from 300 rupees, or about $6, previously.
The duty will lift costs for the likes of Rajesh Exports Ltd. IN:531500 +0.30% and other Indian jewelers, shares of which took a hit after the announcement.
As for the finance ministry, it estimates the move should bring in about 6 billion rupees, or $120 million, into the government’s coffers, just for the balance of the current fiscal year to March 31.
But the question of the day is what, if anything, it might do to support the rupee and improve India’s current-account deficit, which shows the country is a net debtor to the world to the tune of $44 billion in the current fiscal year, adding pressure on the rupee.
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