Govt may cut 2% import duty on gold

The union government is expected to cut two per cent import duty in gold in the forthcoming budget, as local jewellers run out of inventory, a leading US brokerage said.

"We expect a two per cent cut in gold import duty. In our view, the government will, sooner than later, have to withdraw gold import restrictions as local jewellers run out of inventory. The impending drought may also moderate gold import demand," Bank of America Merrill Lynch said in its report.

We expect the current account deficit to widen to 2.6 per cent of GDP in FY15 from 1.7 per cent in FY14 especially as latent demand could lead to a spike in gold import demand, it said.

The March quarter current account deficit came in at $1.3 billion. The net gold imports will increase to $40 billion or 2 per cent of GDP in FY15 from $28.8 billion or 1.5 per cent this past fiscal year. On our part, we never took the shrinkage in the current account deficit from 4.7 per cent of GDP that seriously as it was achieved by these unsustainable curbs in gold imports.

BoAML also expect the RBI to recoup forex at Rs 58/USD levels. After all, Iraq has demonstrated how quickly sentiment can change in the forex market, when import cover is an inadequate eight months.

While advising its clients, the brokerage said its oil strategists expect oil prices to sustain USD 110+/bbl for now. This assumes that the ISIS is contained in northern Iraq.

It could shoot up to $140/bbl if fighting spills over to the oil fields of the South. Note that $10/bbl rise impacts the current account deficit by 0.4 per cent of GDP, it said.

BoAML also expects some relaxation within the overall $30 billion limit for gilts. The RBI needs to raise forex reserves to stabilize Indian rupee expectations. At the same time, sovereign wealth funds have not used up their on-tap $10 bn limit.