Mumbai: India's plan to double import duty on gold may lead to smuggling of bullion into the world's biggest consumer, undermining efforts by the government to raise funds to build infrastructure and ensure food for the nation's poor.

The tax, coupled with high domestic prices and the global recession, will "hamper" jewellery demand, Dharmesh Sodah, director at the World Gold Council, said in an e-mail. India on Monday doubled the duty on gold and silver imports for the first time since 2004.

The levy may worsen the 55 per cent drop in imports by India in the first five months of this year, cooling gold prices that have slid eight per cent since breaching $1,000 (Dh3,670) an ounce in February.

"There is evidence from other key gold markets around the world that higher taxation regimes can lead to the trading of gold along non-official channels," Sodah said.

Overseas purchases of gold bars will be charged a tax of Rs200 (Dh15.1) per 10 grammes, gold jewellery at Rs500 per 10 grammes, and silver at Rs1,000 per kilogramme, Finance Minister Pranab Mukherjee said in his budget speech on Monday.

Gold for immediate delivery rose 0.2 per cent to $926.41 an ounce at 4.23pm Mumbai time. August-delivery of bullion on the Multi Commodity Exchange of India gained 0.4 per cent to Rs14,572 per 10 grammes.

In New York and London gold rose as the dollar halted a rally and oil prices rebounded, stoking demand for the metal as an alternative investment and hedge against inflation.

The US Dollar Index, a six-currency measure of the greenback's value, fell as much as 0.5 per cent yesterday after three days of gains. Gold typically moves inversely to the currency. Crude oil rose for the first day in a week.

"The main driver in the gold market is likely to be the US currency," London-based broker ODL Securities wrote yesterday in a report.

Gold futures for August delivery gained $5.50, or 0.6 per cent, to $929.80 an ounce at 8.42am on the New York Mercantile Exchange's Comex division. Bullion for immediate delivery in London rose $5.29, or 0.6 per cent, to $930.23.

The metal gained to $925.75 in the morning "fixing" in London, used by some mining companies to sell production, from $924.50 at Monday's afternoon fixing. Spot prices have fallen four of the past five weeks.

India bought 51.8 metric tonnes of gold in the January-to-May period, compared with 115 tonnes a year earlier, according to the Bombay Bullion Association, a group of traders and jewellers in Mumbai. Imports were 396 tonnes last year, the group said.

"While the market continues to suffer high prices and lower consumer spending, imports are likely to be a little more restrained," council's Sodah said. "The higher tax on imports will clearly not benefit this."