Gold is the most important part of the Indian Culture as it holds prestige, honor & pride. It gets used in every facet of one’s life during a lifetime.
Ideally, the gold rate gets determined through the international gold rate. However, it is dependent upon additional factors like import duty, dollar price variation etc. Basically, larger producer of gold comes from outside India & in order to import gold, we require paying dollar-rupee conversion prices. If rupee falls against the dollar the landing cost of gold increases & gold becomes expensive. The most important factor is the import duty. While controlling the current account deficit government increases import duty. This turns gold costlier.
Major Reasons behind Gold Rate Fluctuation:
The spot price or melt price for gold comes out to be the same across the globe at any given time. However, the price of gold is different from country to country or even cities to cities. The 3 major reasons for price change can be:
Reason 1: Currency Conversion
Basically, gold rates are fixed in USD. The local currency price would be arbitrage-able close, with the Euro & Yen prices of gold equivalent in value (maybe it comes to be less for minor currencies)-however you need to note that, on a day that the dollar strengthens or weakens, the gold price, if gets quoted in dollars, reflects that. The local currency price of gold will get changed differently. So, one requires to be aware of the currency’s value change, as well as gold’s value change.
Reason 2: Government Taxation
Governments play a vital role in this segment & one may think that what exactly the government’s role in the bullion trade can be. Basically, the government not only works upon fixing the tax rates however poses the rate of import duty.
Reason 3: Local Arbitrage
For instance, make the assumption of the international market price to be $1200 per ounce. It does not mean that you will get that if you buy or sell. E.g. in the USA, a local dealer may charge you 1250 an ounce whereas, on the other hand in Dubai, you may be able to find it for 1245 just because there occurs more supply within a small region.
Talking about the Case in India, as we also get the price in USD & then convert it into INR, any slip or strengthening of currency affects the gold price.
India is available with only 3 working mines Hutti & Uti in Karnataka & the Hirabudd Jharkhand that produces only 0.5% of the total country’s consumption. Henceforth, we largely depend upon imports. Currently, Import Duty is 12.5% (from July 2019) however earlier it was 10%.
You may be wondering why Delhi & Chennai gold rates may be different when they are in the same country holding the same currency & same import duty & other taxes. It is just because of the demand & supply. When the demand goes higher the rates increase & vice versa.
To sum it up in totality, one can easily say that gold has lost its luster & has become out to be a non-performing asset in recent years. However, the market for gold in India has never lost its Midas touch. This is why Gold rates are different in all countries despite it is linked with the International Market.