India’s gold import spikes ahead of festive season

Bullion Watch Jewel TrendzIndia, world’s second biggest buyer of gold that is gearing up for upcoming festivals Dhanteras and Diwali, is witnessing an upsurge in gold import numbers. The official trade data released on September 15 shows a 176 per cent rise in gold imports from $739 to $2 billion during the month of August.

India has witnessed tremendous decline in gold consumption after Government pushed gold import duties from 1 per cent to 10 per cent and other rules like the 80:20 scheme that made re-export of 20 per cent of imports, transaction taxes and even curbs on ETF buying. All this had a huge impact on the gold demand in India, a country where is gold is believed to be sign of purity and used in every auspicious occasion. Imports slipped by a fifth in 2013 though demand remained strong, leading to high premiums and an increase in smuggling. The import numbers are changing as traders are optimistic due to upcoming festive season.

Traders are optimistic

Gold prices have been tumultuous in recent weeks, but as festivals are approaching, traders have turned optimistic. This has been already reflected in the gold import figures. The upward movement of premium for physical delivery of gold reflects the growing gold demand in the market. In August, the premiums were marginal and at some occasions there were discounts on landed cost of imports. But, during mid-September, the premiums were hovering around $10-12.

The head of the country’s biggest refiner recently stated that Indian gold imports and premiums are likely to surge during the rest of the year as buying picks up for the wedding and festival season. Premiums could jump to $10-$12 an ounce over the global benchmark from the current levels of $4-$5, said MMTC-PAMP Managing Director Rajesh Khosla. Imports could climb to 60-70 tonnes per month for the rest of the year from about 40 tonnes in July, Khosla said, adding that August imports were probably around 63 tonnes.

“Demand is expected to increase in the coming months as people start buying from September because of the festive season,” Khosla said.India, the second biggest consumer of gold is preparing to celebrate Dhanteras and Diwali festivals, auspicious occasions for buying gold. The wedding season is also boosting demand for the bullion. The precious metal forms an essential part of a bride’s dowry in India, and is considered auspicious as a gift or offering at religious festivals. The expected increase in demand will squeeze supplies amid curbs on gold imports.

Businesswise the jewellers are positive that by Diwali the demand for jewellery will improve. “I think the industry will perform well in the second half, all the pent-up demand will then find its way! The bridal gold sets and diamonds will be the top sellers in the upcoming festive season sale,” said Saurabh Gadgil of P.N. Gadgil Jewellers. “Gold imports are expected to rise to about 70-75 tonnes per month in the coming months as against a monthly average of 50-60 tonnes,” said Prithviraj Kothari, Vice-President of the India Bullion & Jewellers’ Association in a report by Moneycontrol.com.

Import numbers are rising

According to trade data, the import figures have been rising. In the past 3 months, 214 tonnes are estimated to have entered India. In August 2012, the gold imports were 64 tonnes; however the numbers had fallen to mere 10 tonnes in August 2013 due to stringent import norms. In August 2014, 70 tonnes are estimated to have been imported. It was 47 tonnes in July due to June’s carry-forward stock; June import was an estimated 97 tonnes.

Despite the existing import curbs, the trade data released on September 15 signified 176 per cent rise in gold imports from $739 million to $2 billion during the month of August. “We can manage with monthly gold imports of about $2 billion and the jump in the August number is largely due to last year’s low base after a sudden clamp down. The jump may look alarming, but there is no reason for panic,” Shubhada Rao, an economist at Yes Bank said to Bloomberg.

July, August and September are considered to be strongest months as buying from Asia spikes due to festivals and wedding season in India. The markets at present are not frenzy like previous year, despite of high premiums. But, traders are demanding for $5 an ounce over the London price, that’s down from a whopping $170 an ounce a year ago when the country’s import restrictions left the industry with many problems.

Gold sales are expected to rise by 15 percent to 20 percent this festive season from year-ago levels, said Bachhraj Bamalwa, director of the All India Gems and Jewellery Trade Federation in a report by Moneycontrol.com. Next month Indians will celebrate Dhanteras, associated with Lakshmi – the goddess of wealth, when buying gold is considered auspicious, followed by the festival of lights Diwali and then the wedding season that will extend into early next year. But the stronger demand could squeeze supplies in the domestic market and push up local prices.

Internationally, gold prices are expected to fall or stay consistent but in India, rising premium will adjust the falling price. Gold has fallen four per cent in six weeks abroad, from a recent high of $1,338.6 an ounce in mid-July to $1,287.8 at present. Even ETF investors globally booked some profit. Their holding with the largest one, SPDR, has come down in the past six weeks.

Present scenario

At present, India is easing some norms that were taken when the current-account deficit widened to an all-time high, as faster growth boosts inflows. While the shortfall will widen this year through March 2015 after shrinking in the previous 12 months, it will stay sustainable, according to a Reserve Bank of India report last month.

Controls on imports will probably be permanent and the government may keep a rule that requires importers to supply 20 percent of their cargo to jewelers for re-export or introduce a system of quotas or licenses, said Khosla. Foreign investors have poured more than $14 billion into India’s stocks this year, exchange data show. The economy grew 5.7 percent in the quarter ended June 30, the fastest pace since 2012.

In India, investment demand has not returned. Big drop in local gold prices over past one-year has created doubts about the precious metal as investment. Thus, investors are avoiding investing much in the yellow metal. However, the main beneficiary has been the stocks that have been doing well on hopes that new PM will be able to deliver the promise of “better days.” Kothari says, “Now people are diversifying their investments. This trend will increase in the coming years. During uncertainly people chase gold. Now, since we have stability, economic growth will revive. It will ultimately push up the stock market and real estate prices.”

Gold sales are expected to rise by 20 per cent during the festive season. Weak prices may ignite more buying activity. The late pick-up in monsoon across the country has already lifted the rural gold trade in the country. Meanwhile, the government fears that higher gold consumption may lead to elevated gold imports. This in turn could negatively impact the current account deficit (CAD) situation. It is in this context that a senior government official commented yesterday that the government has no intention whatsoever to relax the 80:20 gold import norm in immediate near term.