Higher gold prices and increased demand for yellow metal ahead of the festive and wedding season puts additional strain on the rupee, according to forex traders and currency analysts.
“Historic highs of gold is also putting the rupee under pressure apart from the usual oil buying. There has been increased demand for gold in the last 3-4 days. Around $100 million worth of gold has been imported every day in the last few days in our bank on account of the festive season and upcoming wedding season,” said a chief dealer at a bank. This has also played a role in pushing the rupee to a record low, he added. The rupee hit another fresh intra-day low of 89.80 on September 23. On Friday, the rupee closed at 88.72 against the dollar.
Festive rush: The immediate pressure from gold imports
Gold prices have surged significantly this year, reaching record highs in India due to global demand, and expectations of US Fed rate cuts. International gold prices touched a record high of $ 3,764 per ounce on September 23. Currently, it is at $ 3,752 per ounce.
The gold import rose 36% to $5.4 billion in August, reaching a nine-month high and marking the second consecutive month of high imports. The growth can be attributed to higher value and partly due to higher imports. The rupee hit record lows against the US dollar, adding to the rally in gold prices domestically.
“Seasonal demand during festivals like Navratri and upcoming wedding season continues to support strong consumption despite high prices,” Anil Kumar Bhansali. head of treasury and executive director, Finrex Treasury Advisors LLP. He further said that demand for the gold has grown in the last few days despite higher prices and the import has been seen higher, mostly due to the festive and wedding season.
“Investors also view gold as a hedge against inflation and currency depreciation, increasing demand for gold when the rupee weakens or inflation is high,” said Bhansali.
Why gold demand is resilient despite record prices
Agreeing to that, Jateen Trivedi, VP research analyst – commodity and currency at LKP Securities, said that uptick in gold purchases can be also attributed to importers’ panic buying ahead of festive and wedding season in fear of further rise in prices.
“Higher gold price is already weighing on the rupee since last one month. If gold price remains above Rs 1,10,000, rupee will keep facing hurdles,” said Trivedi.
The domestic currency has been under pressure since a while on account of global headwinds. Currency experts believe rupee will breach to 89 level soon, considering persistent global uncertainties and absence of a US-India trade deal.