INDIA May 11 2017 2:36 PM

MUMBAI (Scrap Register): Indian gold demand is witnessing a pick-up amid some renewed optimism, with strong expectations for the rest of the year, this according to the Global Precious Metals report published by UBS.

According to UBS, Indian gold demand recovery suggests healthy underlying appetite. The recovery does suggest that core demand remains intact and normalization in the local regulatory environment up ahead should pave the way for more stable off-take in the future.

Core gold demand is there and is expected to average around 700-900 metric tons in the medium to long term.

Volumes still remain subdued as policy uncertainty dominates the overall sentiment, with the upcoming Goods and Services Tax (GST) and import duties announcements expected shortly.

Uncertainty comes from varied expectations in regards to possible tax rate levels.

“Some are of the view that the import tax is likely to be lowered from the current 10% level, such that even with the introduction of GST, the overall tax rate would not be too different from the current level of around 12% (10% import duty, 1% excise tax, 1% VAT). A potential combination would be a 7% import tax and gold being classified under the 5% GST bracket,” Joni Teves, precious metals strategist at UBS, said in the report.

But, others still think that the import duty will be kept at 10%, with a GST of 5% to be charged on top of it.

“The variety of responses suggests that there is very little visibility on the matter and the government has likely made a point of not giving much indication ahead of the announcement,” Teves explained.

Expectation of some normalization are very high, as policy uncertainty fades as soon as this summer, said the report.

Improved demand in gold has also coincided with better liquidity this year.

“Reserve Bank of India data shows that the value of currency in circulation has recovered after the sharp drop triggered by the demonetization. According to feedback from our contacts, seasonal demand in recent months has been strong – off-take related to the Akshaya Tritiya festival has apparently been quite strong, even relative to historical levels,” Teves said.

India’s government has also been encouraging moving physical household gold holdings to other types of investments, including gold deposits (Gold Monetisation Scheme), gold bonds (Sovereign Gold Bond Scheme) and gold coins (India Gold Coin).

But, these initiatives have been slow to take-off, Teves said.

Gold imports by India reportedly rose more than four-fold in April, Bloomberg reported citing a source in the country’s finance ministry. Shipments are said to have increased to 98.3 metric tons last month from 22.2 tons recorded during the same month of the previous year. The demand was largely driven by jewelers restocking ahead of the wedding season.

Earlier this week, UBS also published another report, stating that growing demand from India and China are to support gold prices at $1,200 level. “Further pressure [on gold prices] cannot be ruled out for now, but we expect bargain hunting to emerge and physical buying to strengthen should the market test $1200, paving the way for a recovery,” the report said.