This comes a day after the Reserve Bank of India extended its decision to curb gold imports by banks. The central bank said gold imports would be restricted to "the genuine needs of the exporters of gold jewelery."
India's gold imports surged in May and we have previously reported that gold and oil imports are one of the driving factors behind India's current account deficit — when the value of imports exceeds that of exports. And the current account deficit can hurt economic growth.
This is because a large current account deficit (CAD) can impact foreign exchange rate and weaken the Indian rupee. If India has to pay more of its imports this would affect economic growth. What's more? As a weaker global economy has impacted exports, India has used hot money to finance this deficit, and that money can flow out very quickly in a risk off environment.
CAD reached a record high of 6.7% of GDP in the last quarter and has been blamed for weakening the Indian rupee.
All India Gems & Jewellery Trade Federation's Bachhraj Bamalwa says the tax increase is likely to boost gold smuggling, according to Bloomberg. Gold imports are expected to fall 15% - 20% this year, down from 860 tons last year.
India is the world's largest gold market and investors watch Indian demand for gold closely. India also raised import tax on platinum to 8%.
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