The recent rebound in gold prices to record highs has dampened expectations within India’s bullion industry for a profitable festival season. This disappointment comes despite a prior boost in optimism following a significant cut in import duties two months ago, which brought rates to their lowest in a decade.
Industry Expectations
Prithviraj Kothari, president of the India Bullion and Jewellers Association (IBJA), expressed the sentiment of many in the industry: “Everyone was feeling positive about demand after the duty cut since we were seeing a spike in interest, and it really made us think the festival season would be amazing.” However, the surge in gold prices has led him to predict that demand may fall 20% lower than usual in terms of volume.
The festive season, especially significant for gold purchases, is traditionally seen as an auspicious time for buying gold in India, the world’s largest gold consumer after China. Festivals such as Dussehra, occurring on October 12 this year, and Diwali, later in October, are particularly important occasions for gold buying.
Changing Consumer Behavior
Kothari noted a shift in consumer buying habits, with many opting to distribute their purchases throughout the year rather than waiting for special occasions. This trend appears to be driven by rising gold prices and a reluctance to invest in heavy, expensive jewelry.
According to Amit Modak, chief executive of PN Gadgil and Sons, a jeweler based in Pune, “Consumers are opting for lighter, more affordable jewelry to stay within budget.” Since last year’s festive season, gold prices have increased by over 25%, while consumers’ spending power has not kept pace.
Impact of Duty Cuts and Market Dynamics
In late July, India implemented a dramatic reduction in import duties on gold, slashing rates from 15% to 6%. This move initially lowered local gold prices to a four-month low of 67,400 rupees ($803.16) per 10 grams, leading to a surge in demand. However, since then, prices have climbed by 13.2%, reaching a record high of 76,331 rupees, aligning with global market trends.
After the duty cut, demand surged, prompting jewellers to place significant orders with manufacturers ahead of the festive season. Ashok Jain, the proprietor of Mumbai-based gold wholesaler Chenaji Narsinghji, observed that “after the duty cut, demand was robust,” but added that jewellers are now scaling back their orders. “Many jewellers are taking delivery of only half of their bookings,” he said.
In Kolkata, a jewelry manufacturer noted that many jewellers are now avoiding stocking heavier, more expensive jewelry due to declining demand.
Price Premium Adjustments
To stimulate demand, dealers have also adjusted the premiums they charge compared to the import duty. Currently, Indian dealers are charging a premium of up to $3 per ounce over official domestic prices, inclusive of the 6% import and 3% sales levies. This is a significant reduction from the premium of up to $20 seen in the last week of July.
In August, India’s gold imports saw a staggering 216% increase compared to the previous month, totaling 136 metric tons, as jewellers anticipated strong festive demand. However, with prices soaring, imports reportedly dropped by 60 tons in September, as dealers adjusted to changing market conditions.
Conclusion
The combination of rising gold prices and shifting consumer habits has created a challenging environment for India’s bullion industry as it approaches the festive season. With expectations of a 20% drop in volume demand, the industry is left grappling with how to adapt to these market dynamics while navigating the ongoing fluctuations in gold prices.
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