PremiumSeveral factors have worked against gold demand in the recent past, be it the skyrocketing gold prices, subdued rural income or the government's new stringent measures to curb the flow of black money in the system
India’s trade deficit has been narrowing from the beginning of this year, largely on the back of declining imports, especially those of merchandised goods.
In a recent report, brokerage firm Nomura said the country is likely to post its first quarterly current account surplus in nine years in the June quarter at 0.8% of gross domestic product), reported Press Trust of India. “We believe this swing in the current account balance will be driven by a sharp narrowing of the merchandise trade deficit," Nomura said in a note.
And why not? Gold imports, once a key contributor to India’s trade bill, hit a 31-month low of $1,078.14 million in July. On a year-on-year basis, gold imports have fallen over 63.65% to $1.08 billion, from $2.97 billion, shows Reserve Bank of India data.
Several factors have worked against gold demand in the recent past, be it the skyrocketing gold prices, subdued rural income or the government’s new stringent measures to curb the flow of black money in the system.
Recent World Gold Council (WGC) data highlights India’s jewellery demand declined nearly 41.37% in January to March 2016 at 88.41 tonnes against 150.80 tonnes in the same period last year. Jewellery purchases in India have fallen to 186.3 tonnes in the first half of 2016, the lowest since 2009. This was also due to a six-week-long national strike by jewellers, followed by a steep rise in gold prices after the strike ended.
WGC has trimmed India’s gold demand estimates to 750-850 tonnes for this year, lower than the May forecast of 850-950 tonnes. However, it is optimistic that demand in the second half of 2016 will be better than the bleak first half.
A large part of the gold demand in India, which is the world’s second largest consumer of gold, comes from rural areas; and a good monsoon this year is likely to boost rural incomes, reviving demand for the precious metal. That’s apart from the usual boost during the festive season.
While some economists broadly agree that rising rural incomes will attract more buyers to the yellow metal, they point to some factors that are likely to decide whether a significant revival in gold demand will happen in the near future. “Unless gold prices rise further, higher rural disposable incomes will revive demand for gold purchases after the kharif harvest. Nevertheless, consumption of other items will also rise, including consumer durables and non-durables, restricting the surplus available that can be channelled into gold," Aditi Nayar of ICRA Ltd explained.
Apart from that, inflation also has a role to play, Suvodeep Rakshit, an economist with Kotak Securities Ltd, added. “Historically, it has been seen that higher rural incomes lead to a revival in gold demand. Given the trend over the past few months and the outlook on inflation, revival in gold demand may not be very high, as seen historically," he told Mint.
In short, many things have to fall in place for a revival to happen in investors’ appetite for the yellow metal.
