The fall in gold prices primarily impacts Indian households, who own some of the largest reserves of gold across the world.
The pen is known to be mightier than the sword, and Finance Minister Nirmala Sitharaman proved it in one fell swoop.
By announcing a cut in gold customs duty in the Union Budget 2024, gold prices tumbled over five percent, wiping off over Rs 10.7 lakh crore in value in a single day. When compared to the equity markets, this move caused the sixth largest wealth erosion recorded so far.
The fall in gold prices primarily impacts Indian households, which combined, own some of the largest reserves of gold across the world. Currently, Indian households own approximately around 11 percent of the entire world’s gold. This is more gold than large developed nations like USA, Germany, Switzerland and the IMF combined.
Why did gold prices fall on Budget day?
Since the year began, gold prices had been on a tearaway rally, jumping 14.7 percent and outperforming the Sensex, which has risen around 11 percent during the same time. Thus far in July, MCX gold has dropped by nearly 5.2 percent.
However, during the Budget, the Finance Minister announced a reduction on Basic Custom Duty on gold and silver from 10 percent to 6 percent and Agriculture Infrastructure & Development Cess (AIDC) from 5 percent to 1 percent. It will effectively reduce the overall taxes on gold from around 18.5 percent (including GST) to 9 percent.
Who does it impact and how?
Gold traders were not happy with the move to reduce the value of the precious metal and began selling off their holdings, booking profits.
Gold financiers were also none too pleased with the move, as it reduces the value of gold and will significantly reduce their loan-to-value (LTV) ratios, making them less financially secure.
A lower LTV ratio means that the value of the gold used to secure loans is less compared to the total loans issued, thus reducing the companies’ margin of safety.
Even Indian households and temples, which combined own over 30,000 tonnes of gold, saw the value of their holdings sharply.
However, the beneficiaries that will benefit from the move are organised jewellery players. The reduction in duty has been a long-standing demand of traders, as it will slow down smuggling as well.