Sushil Kumar Sinha, the business head for commodities at Karvy Comtrade, discusses the gold market.
q Why are Indians such big buyers of gold?
a Indian consumers generally view gold as a hedge against inflation because the inflation rate in India is very high. Consumers measure the value of gold according to traditions where gold is considered a symbol of wealth and prosperity. Consumers also invest in gold as a part of household savings and a long-term investment to protect wealth. Gold also has a huge social, economical and sentimental significance.
What's the effect of lower prices?
Lower prices will lead to an increase in the demand for gold and support gold prices in the near future. However, the biggest threat to the government's exchequer is the smuggling of gold that could increase due to the arbitrage between the customs paid price and price without the import duty which would be large enough to entice smugglers to trade in gold bars and coins illegally in the country.
What kind of impact are factors including higher import duties having on India's gold market?
India has increased the import duty on gold from 6 per cent to 8 per cent and also forced domestic jewellers to purchase gold on a cash basis. It means that gold jewellers can purchase gold up to the limit of cash available with them. The increase in import duty would also affect gold prices while limiting the purchase of gold in the market due to lower supply and higher demand. Gold imports are expected to fall in June.
What are your expectations going forwards?
It is expected that gold prices might recover in the future as Indian consumers see gold as a hedge against inflation and an investment in household savings, which should support gold prices. The fall of the rupee against the dollar might also extend the gains in gold prices.