The government's move to hike import duty on gold may do little to curb its demand and make it an even more sought after commodity in the near-term, pushing up the price of the precious metal, according to industry experts.
With spiralling gold imports putting huge pressure on the current account deficit, government last week hiked the import duty on the metal to 8 per cent, up by 2 per cent, in a bid to rein in demand.
Post the announcement, however, there was "mad rush" to buy gold as traders expected short supplies, said Harish Galipelli, head of commodity and currency derivatives at JRG Wealth Management Ltd.
"We, as a nation, are sentimental about gold. So, steps to curb gold imports are not likely to do much but in fact might raise its demand and it was clearly shown by the prices hitting 5-week high post the announcement hiking gold imports," Mr Galipelli said.
On June 6 and 7, the two consecutive days after import duty hike, gold prices in the national capital advanced by a total Rs 640 to touch 5-week high of Rs 28,300 per 10 gm.
However C P Krishnan, whole-time director of Geojit Comtrade, said that in the medium-to-near term, this move - coupled with RBI's decision to extend the restrictions on gold import to other agencies in addition to banks - would make trading in the metal less speculative.
"The impact of the gold duty cut is that the demand for the metal will shrunk. Anticipation and speculation in gold will come down... Now, gold will not remain attractive as an investment option," he said.
The increase in duty will also have an impact on international gold prices because India is its largest consumer, and curb on Indian gold imports would "certainly hit its global demand", he added.
But, Mr Krishnan said that gold will continue to remain attractive for individual buyers, and thus prices will soar in near-term.
On gold's outlook this year, Mr Galipelli said it is going to move in the broad range of Rs 23,000-28,000 per 10 grams and $1,300-1,480 an ounce in international markets.
Mr Krishnan expects that gold prices overseas are likely to hit $1,500 an ounce by 2014.
The hike, second in six months, was aimed at curbing import of gold which is mainly responsible for rise in the current account deficit impacting on the country's foreign exchange reserves as well as the rupee value.
The current account deficit, which is a difference between inflow and outflow of foreign currency, touched a historic high of 6.7 of GDP in the quarter ending December 2012.
However, some industry experts believe that gold duty hike may increase its smuggling.
Earlier last week, the World Gold Council (WGC) said the hike in import duty on gold will make the precious metal expensive, while cautioning that curbing supply will not be effective in the long run as this is likely to lead to demand being met through unauthorised channels.
"The hike in customs duty on gold from 6 per cent to 8 per cent...is yet another step to limit supply of gold by making it more expensive. Almost all of India's gold demand is met through imports and this hike will increase the cost of gold for retail customers," WGC India managing director Somasundaram P R said in a statement.
"All these restrictions on imports will not affect the gold demand but will lead to increased smuggling. In 2012, about 200 tonne gold was smuggled into the country and according to industry estimates this year it may rise to 300 tonne, which is 30 per cent of the total imports," Bachhraj Bamalwa, former chairman of the All India Gems & Jewellery Trade Federation (GJF), had said on Friday,
Meanwhile, GJF chairman Haresh Soni said the industry body has started communication with the government and will meet the Finance Minister next week on this regard.
"We want to discuss the issue with the Finance Ministry as the industry as a whole will suffer. The import was more when the duty was 6 per cent than when it was 4 per cent. With rise in smuggling the government will also lose out on revenue," he added.
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