Import duty cut in budget would plunge the precious metals

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After gaining more than 1% in the previous week, Precious Metals struggled to preserve its bullish momentum and edged lower during the first half of the week. Although the pair staged a rebound on Thursday from the weekly low, it couldn’t close the day in the positive territory. With buyers remaining in control on Friday, the pair closed the week virtually flat.
Day traders used social media platforms to organize a mass movement to buy several stocks, most notably GameStop and AMC Entertainment Holdings, that were widely known to be shorted by large hedge funds in the US. The unprecedented upsurge witnessed in those stocks caused large investment firms to suffer heavy losses and triggered a flight-to-safety in the financial markets on Wednesday, lifting the USD and dragging Gold and Silver.
But then precious Metal saw a bout on short-covering on last two days of week as it was speculated that GameStop short squeezed traders moved to precious metals.
FOMC Chairman Jerome Powell refrained from delivering any surprising remarks on the policy outlook after the US Federal Reserve left its policy rate unchanged as anticipated. On Thursday, the US Bureau of Economic Analysis advance estimate showed that the real Gross Domestic Product (GDP) expanded by 4% on a yearly basis in the fourth quarter as expected.
Next week
At the start of the week, the Manufacturing PMI data from China, Germany and the US will be looked upon for fresh impetus. The business activity in those major economies’ manufacturing sectors is expected to continue to expand into the New Year and the market reaction is likely to remain limited.
On Wednesday, the ADP Employment Change data will be featured in the US economic docket ahead of Friday’s critical Nonfarm Payrolls (NFP) report. The market consensus points out to an increase of 85K in NFP in January. A gloomy labour market report could assist the USD to attract investors.
More importantly, investors will keep a close eye on India Union Budget on Monday. The Union Budget 2021 is scheduled to be presented in Parliament on February 1, 2021. Finance Minister Nirmala Sitharaman has promised a never before like Union Budget as the Modi government looks to give a further boost to Indian economy.
Budget expectations for Precious metals Sector
The gems and jewellery sector makes a significant contribution to the country’s overall economy. Just like there were high expectations from last year’s budget this year too, the fraternity is looking for a positive outcome from the budget.  Considering the current government encourages and promotes a business conducive environment, jewellers are hopeful that they will address the same which will benefit the industry. Following are the wishes and expectations from Union Budget 2021-22:

  • Reduction in import duty on Precious metals of 12.5% to 8%

Multiple increases in import duty on precious metal had resulted in gold coming in from countries such as South Korea and Malaysia, with whom India has signed Free Trade Agreements (FTAs), thus increasing the price arbitrage in the domestic markets. The resultant gap in the price of official gold imported through the banking channel and unofficial imports is hurting manufacturers/retailers/bullion importing agencies/refiners and many others involved in the tax compliant business systems. The high import duty is indirectly creating a disincentive to the organized players in the industry. A lower Basic Customs Duty (BCD) on gold should help make the unofficial route for gold imports unattractive. But if Import duty is cut 4-5% as proposed, it would lead to same proportional fall of 4-5% in domestic gold and silver prices as per new conversion formula of deriving prices.

  • Providing rebate to the foreigners on buying jewellery in India

Foreign tourists and NRIs visiting India are not investing in gold jewellery like before as there is no mechanism to refund the GST on their purchase which they are otherwise entitled to claim. The Integrated Goods and Services Tax Act of 2017 allow a foreign national or an NRI, who enters India for a stay of less than six months, to claim GST refund when he leaves India. Gold jewellery attracts 3% GST. The tax component is significant on account of the high value of the commodity and that becomes one of the decisive factors for a tourist to buy Gold Jewellery in India.

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