NEW YORK (TheStreet) -- India's decision to raise import taxes on gold and platinum for the third time this year is an attempt to improve on the country's widening trade deficit by reducing imports and raising capital inflows. Whether these latest measures from the Reserve Bank of India (RBI) will actually limit metals demand before India's festival and wedding seasons is an entirely different question.
With little evidence to support the argument that internal demand in India is slowing, it is much more likely that policy changes to reduce imports will only encourage black market smuggling of precious metals. If this does occur, expect to see an Indian gold market in disarray, with jewelry prices showing marked increases in coming months.
This year's gold slump has spurred a round of bargain hunting, with year-over-year foreign gold purchases higher by 87% to 383 metric tons during the second quarter.
This consistent demand for gold bars, coins, and jewelry opens the gateway for black market activities that could undermine the government's policy intentions and weaken sales prospects for established retailers. Gold premiums in regional markets have risen to record levels since the RBI started forcing the suspension of imports and requiring 20% of each shipment to be stored for overseas re-sale as jewelry.But the latest decision to lift gold, silver, and platinum tariffs to 10% will further limit official supply, complicate the ability to track true inventories and contribute to renewed volatility in metals prices. India's current-account deficit is largely the result of crude oil and precious metals imports, and represents one of the biggest risks for the country's long-term growth prospects. Gold and platinum tariffs were 4% at the beginning of the year, and the latest increases were designed to bring gold import levels close to 850 tons for 2013. At the same time, capital inflows will be helped from bonds issued by state-run companies that will be used to fund investments in infrastructure. This is the framework that helps define the RBI's strategy in dealing with current account problems that have pushed the rupee to all-time lows.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV