The stunning fall in gold prices couldn’t come at a better time for Indian consumers. It’s wedding season in India, the world’s biggest buyer of gold, and this is a traditional time for people to give gold to brides or to wedding guests. Moreover, next month is the Akshaya Tritiya festival, a time for Hindus to buy gold and other precious metals.
“The decline will be positive for jewelry as there will be a pick-up in demand because affordability will increase,” Mehul Choksi, chief executive officer of Gitanjali, India’s biggest jewelry and diamond retailer, told Bloomberg News.
Consumers aren’t the only people in India happy to see a bear market for gold. The country’s economic gurus, too, are no doubt relieved by the 19 percent fall in gold prices since the beginning of 2013. The high cost of gold has been a significant burden for the already struggling Indian economy. Economists and ratings agencies, for instance, have been worried about India’s current account deficit, which hit a record in the last quarter of 2012 of $32.6 billion, or 6.7 percent of gross domestic product. Gold imports account for about 3 percent of GDP, Chief Economic Advisor Raghuram Rajan said in an interview in March.
Indians don’t purchase gold just for festive occasions. Many people in India also have been alarmed by the government’s inability to keep prices under control and so have been putting their money into gold. Wholesale prices increased 5.96 percent last month, better than expectations, the government reported on April 15. That’s the slowest gain in 40 months. But in February, prices jumped 6.84 percent and consumer prices last month rose 10.39 percent.
This leaves a way to go before Indians are likely to stop considering gold as a hedge against rising prices. “People are a little worried about inflation and they are moving to gold as an asset, especially in rural areas,” Rajan said. “The fact that people are investing so much in gold recently suggests we have to give them more faith in financial assets than we have right now.”
India has had some success in steering its citizens away from gold. The government of Prime Minister Manmohan Singh has tripled import taxes from as low as 2 percent over the past year. That policy combined with high global prices and a weakening local economy to reduce India’s overseas purchases of gold by 11 percent last year, to 860 tons, according to the World Gold Council.
That still made India the world’s top consumer, though, so the recent drop in gold prices is going to provide a much-needed boost for the country’s economy at a time when the government wants the Reserve Bank of India to be more aggressive in cutting interest rates. Falling gold prices might give the central bank more room to do just that. Indeed, Ashima Goyal, a member of the Reserve Bank of India’s Technical Advisor Committee, told Bloomberg First Word in an interview on Tuesday that the drop in gold prices is “definitely positive” for the country, with weaker gold easing pressure on the current account deficit.
Source: Bullion Bulletin