With the rise in import duty on gold from 7.5% to 12.5% by the Government of India, it is expected that Gold price might shoot up in the coming period. Also, there is a heavy outflow by Foreign Portfolio Investors (FPIs) from the Indian Equity Market. So, let’s discuss in detail what are the developments in the Gold Market and when FPIs might stop selling Indian Equities in this article.
Reasons for Possible Rise in Gold Price:
- The government of India has increased the import duty on gold from 7.5% to 12.5%. Due to this, there will be value-added to the existing Gold Holding, and hence on account of the demand-supply equation, the gold price might go up.
- This import duty on gold has been increased because the Current Account Deficit (CAD) of India is already at a 3-year high level. This high level of CAD accounts for the reasons for increased crude oil prices which is an essential commodity.
- Gold not being an essential commodity and a want-based commodity, the import duty on gold has been increased, which will lead to a rise in Gold prices.
When Will FPIs stop selling Indian Equities?
During the calendar year 2022 i.e., from 1st January 2022 to 30th June 2022, there is total Foreign Portfolio Investors (FPIs) selling of Rs. 2.23 Lakh Cr. FPIs selling in June 2022 was over Rs. 50,000 Cr.
Indications of FPIs Stopping Selling Indian Equities?
- Firstly, until the US 10-Year G-Sec Yield does not cool off, the FPIs selling might continue.
- The rise in US 10-Year G-Sec Yield was much faster as compared to India’s 10-Year G-Sec Yield which has resulted in a reduction in the gap between both the yields, hence the flow of FPIs towards US 10-Year G-Sec was on the higher side.
- Further, the way the Current Account Deficit (CAD) of India is rising on account of increased Crude Oil prices due to which the domestic currency is depreciating, the FPIs are finding their investment depreciating in dollar terms, hence the selling may continue.
- Factor Driving Dollar Index:
- US Dollar is strengthening because there is a heavy inflow of money going back to the US.
- Since the Equity Markets and other investment avenues are not looking lucrative right now, the fund is diverting to US 10-Year G-Sec Yield which is appearing to be an attractive opportunity for investment in the current market scenario.
What Should Investors Do?
Amid the uncertainty in the market and continuing geopolitical tensions, Gold as an asset class appears to be a safe asset class for investors. Also, the rise in import duty on Gold might lead to a rise in gold prices in the coming period. Moreover, the continuous selling of Indian Equities by FPIs are also resulting in negative return by the stock market. But from a long-term perspective, investors should expect a rational return of lower to mid-double digit figure returns. Do follow due diligence before making an investment decision and follow the principle of asset allocation and not put all eggs in one basket.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.