Decline in gold prices is not likely to add pressure to India’s current account deficit or the domestic currency, as the metal’s appeal has diminished, Nomura said in a research note today.
According to the global financial services firm, the recent decline in gold prices is not yet a “concern” for the Indian rupee.
According to the Japanese brokerage firm, since 2009, lower inflation, improved RBI credibility and strong performance in financial assets have diminished gold’s appeal as an investment.
Gold prices are currently hovering around Rs 25,000 per 10 grams, after it dropped to a four-year low in the domestic market.
Moreover, the correlation between gold prices and gold demand in India had turned from “negative” to “positive” since 2009. This change in correlation was attributed to a number of factors including a “growing preference for gold as an investment asset rather than purely as a consumer good”, Nomura said.
As per the brokerage, an investment in the NIFTY index in the 12 months to end-June, would have yielded more returns than an investment in gold in rupee terms.
“While we acknowledge a potential pick-up in seasonal demand towards the end of the year, this does not change our medium-term constructive view on INR,” Nomura said.
The rupee is hovering around Rs 63 per US dollar.
It further noted that “coupled with a gradual economic recovery, we note that India’s external vulnerability metrics continue to improve, amid signs that the RBI is being less aggressive in its USD buying/INR selling intervention”.
Moreover, trade data continued to show weakness in gold demand, with import volumes dropping 21 per cent month-on-month in June by our estimates.
This is attributed to a number of factors, chief among them the seasonal slowdown in demand during the monsoons. In addition, with rural consumers accounting for the vast majority of gold purchases, the decline in agricultural wage growth is also likely to be a factor in weakening demand, Nomura said.