COMMENTARY — Indian silver imports relaxed

The habit of relaxing precious metals regulations in India is catching. Last year, it was gold; this year, silver. The Indian government announced in February that, for the first time in more than 40 years, silver can be imported on payment of a 500-rupee tax (just over $15) per kilo, or about 50 cents per oz. (all currency figures are in US amounts).

Until now, only small amounts could come in officially via the State Bank of India against exports of silver jewelry. A mere 44 tons came in on this scheme last year. But, as the real Indian demand for silver is now between 1,500 and 1,800 tons annually, which has been met by smuggling from Dubai and Singapore, the import relaxation will bring a major change to the market. The government hopes legal imports will be around 600 to 800 tons per year, bringing in taxes of close to $10 million, but this is likely to be exceeded. The mere prospect of legal imports was enough to send the silver price crashing on the Bombay market. It fell by more than $20 per kilo (62 cents per oz.) and began to narrow the long-standing premium in Indian silver prices over the international price. Since the mid-1980s, when Indian silver demand began to improve and could no longer be met by internal recycling, the local price has usually been between 60% and 100% over the world price. Last October, the Bombay price at 8,000 rupees per kilo was equivalent to $7.80 per oz. The incentive for smuggling was thus considerable, but within a few days of the announcement of legal imports, it was down to the equivalent of $5.50 per oz. with few buyers around.

Everyone was waiting for the price to go even lower. So, for the first time in several years, the Indian silver price was more in line with world prices. Bombay traders swiftly calculated that silver could now be delivered in India (with duty paid) for around $4.24 per oz. on an international price around $3.60.

. . . By cutting the premium over the international price, Indians are getting more silver for each rupee. Since the major growth area in silver demand in the past few years has been medals and small bars often given as gifts, the fall in the local silver price is likely to stimulate more sales. Silver jewelry and silverware sales, which also posted strong growth last year, will also benefit.

For traders outside India, the immediate effect was a surge in silver demand beyond anyone’s expectations . . .

— From a report by Timothy Green which appeared in a recent newsletter of The Silver Institute in Washington, D.C.