Gold demand in India, the biggest user, is poised to decline during the main festival season as the weakest economic growth in a decade curbs discretionary spending and volatile prices spur investor selling.
Sales of jewelry, coins and bars between August and November will be less than a year earlier because of the slowdown and a bullion shortage caused by central bank curbs on imports, said C. Vinod Hayagriv, managing director of C. Krishniah Chetty & Sons Pvt., a Bangalore-based retailer. He didn’t say how much gold was sold during festivals in 2012.
India’s economy expanded at the slowest pace since 2003 in the year ended March as investment fell and consumer spending in the nation of 1.2 billion people moderated. HSBC Holdings Plc and Goldman Sachs Group Inc. cut growth estimates for India to 4% in 2013-2014. Falling gold demand is a reprieve for the government, which raised import taxes thrice this year to moderate consumption that has contributed to the slide in the rupee and an all-time high current-account deficit.
“Fresh buying is not happening because there is a liquidity crunch and consumer spending has come down,” said Haresh Soni, chairman of the All India Gems & Jewellery Trade Federation. “The sentiment is weak because of the economy and people don’t have cash for additional spending. Some consumers are delaying purchases for marriages until prices stabilize.”
Bullion in India rallied to a record last month after the rupee slumped to an all-time low. The rupee is down 13% this year and is the worst performer after Indonesian rupiah among Asian currencies on concern that foreign capital outflows will accelerate as the U.S. Federal Reserve prepares to reduce monetary stimulus.
“Everything is very fluid,” said Hayagriv. “Consumers will just wait it out because there are all sorts of uncertainties, an election and policy restrictions going on at the same time.”
Exchange-traded funds backed by gold in India saw a net outflow of 5.88 billion rupees ($93 million) in August, according to the Association of Mutual Funds in India. The value of assets fell to 118.28 billion rupees last month from a record 120.6 billion rupees in January, data showed.
Higher tariffs and central-bank rules linking overseas purchases to re-exports may cut gold imports in the second half to not more than 150 metric tons from 478 tons in 2012 and spur smuggling, according to the jewelry federation. Consumption in India, which imports almost all the bullion it needs, accounted for about 20% of global demand in 2012, according to data from the World Gold Council.
India today raised the import duty on jewelry to 15% from 10%, according to a statement from the nation’s finance ministry.
Recycled gold supply jumped after bullion priced in rupees surged to a record last month, helping ease a raw material scarcity, according to Soni. Banks and traders have yet to resume imports after halting purchases in July, he said.
Futures in Mumbai, which advanced to an all-time of 35,074 rupees per 10 grams on Aug. 28, was at 30,194 rupees today. Prices in rupees, which include a 10% import tax, have fallen 2.2% this year, compared with a 21% drop in the metal priced in dollars as some global investors lost faith in the metal as a store of value.
“People want to wait right now and we feel that the consumption will be less this festival and wedding season than last year,” said Soni. “Every time any market is very volatile, consumers tend to stay away.”
Gold is bought in India during festivals, for marriages as part of the bridal trousseau and gifted in the form of jewelry by relatives. Consumption was 864.2 tons in 2012, while imports totaled 860 tons, according to data from the council.