The slowdown in gold demand growth in India, stoked by an official crackdown on supplies, may have bottomed out and a recovery is expected once the new government eases some of the restrictions on imports, World Gold Council (WGC) managing director (India) Somasundaram PR said.
Importantly, any failure of the monsoon this year could also spur investment in gold due to fears of elevated inflation and increased government intervention to boost demand, even though rural disposable income may get hurt, Somasundaram told FE.
The first forecast of the weather office has predicted a 60% chance of El Ni?o, which had caused the worst drought in 37 years in 2009, and a 23% chance of a deficit monsoon in 2014.
Although in 2009 the country’s gold demand dropped by 32.6% from a year before, it scaled a peak in 2010 as the full impact of the drought was felt on inflation, analysts said. Wholesale price inflation hit 9.55% in 2010, compared with 2.35% a year before, as a drop in farm production in 2009 drove up food inflation to 17.69%.
Gold demand is expected to rise up to 1,000 tonne this calendar year, compared with 975 tonne a year before, he said. “Although the import duty on gold continues to be high, there are enough indications from trade sources that it could be reviewed once the new government comes. Moreover, policymakers are now more neutral towards gold than they were some six months earlier, perhaps due to the reduction in the current account deficit (CAD). ”
He said imports under the RBI’s 80:20 rule have improved to 40-50 tonne a month from below 10 tonne late last year, boosting trade sentiments.
India hardly produces any gold and depends on imports to cater to both domestic demand as well as exports after value addition. Usually, the import volumes exceed annual requirements, as jewellers also stock up for future needs.
Since organised players depleted their inventories last year after the government and the central bank stepped in to choke supplies, they need to go for replenishing stocks now. This will help drive imports.
Moreover, demand in India, which was beaten by China as the world’s largest gold consumer last year, rose 13% to 975 tonne in 2013, Somasundaram has said.
This is despite the fact that the government raised the import duty on the precious metal three times to 10% from 4% in the beginning of the last year and the central bank came up with the 80:20 rule, which mandated that at least one-fifth of the imported gold be kept aside for re-exports.
The RBI also directed that no fresh tranche of imports by a trader would be allowed until the 20% of the previous imported volume is exported after value addition.
He argued that the basic factors supporting gold demand ? traditional appeal, absence of more profitable investment tools and high inflation ? haven’t changed. Moreover, geo-political tensions such as the possibility of Russia invading Ukraine may enhance gold’s safe-haven appeal. So chances are that the precious metal?s demand would rise this year, he added.
Although finance minister P Chidambaram had said the government could review in March some of the measures taken to curb gold imports, any cut in the import duty on the metal could be effected “only when we are absolutely sure that we have a firm grip on the CAD”.
The government hasn’t yet taken any decision to roll back any of these steps, mainly due to the elections. The CAD was estimated at $32 billion in the last fiscal, compared with $88.2 billion a year before.