The Indian government's aggressive efforts to curb gold imports may dampen demand for now, but a national obsession with the precious metal means that it is unlikely to lose its appeal for long.
The government this month raised the import duty on gold to 8 per cent from 6 per cent, the second increase this year, as part of its efforts to rein in the gaping trade deficit. The central bank has said that jewellers should only use cash they have, rather than use bank credit, to buy imported gold.
"In its endeavour to curtail the current account deficit, the government has announced a series of measures to curtail gold imports," said Bharat Chhoda and Dhvani Modi, analysts at Icici Direct.
"The recent regulatory changes, non-availability of credit for import of gold, could have some bearing on the imports. However, considering the affinity towards gold, demand should not get impacted significantly.
"Gold plays a very important role in the social, religious and cultural life of Indians. A large part of the demand comes from the customs relating to gifting of gold during weddings. Apart from this, a large part of rural India - where access to other investment avenues is minimal - also parks their savings in gold."
India is the world's biggest consumer of gold. Although demand fell 12 per cent last year compared with 2011, the market remained on top, despite expectations that it would be overtaken by China, according to the World Gold Council. Demand in India surged 41 per cent in the fourth quarter of the year to 261.9 tonnes compared to the same period last year.
The plunge in gold prices to a two-year low in April meant that demand rocketed among Indians, who rushed to the shops to take advantage of cheaper rates.
"Jewellery shops in … India have run low or in some cases completely out of stock," the World Gold Council said.
"Gold has been rapidly flowing into the major gold markets in order to meet this intense demand. In India, a market that represents 28 per cent of consumer demand, imports of gold are headed towards record levels in the second quarter of 2013. We anticipate about 300 to 400 tonnes of imports in the second quarter, as much as a 200 per cent year-on-year increase and almost half of total imports last year."
Even before the drop in prices, however, demand in India was strong, at 257 tonnes in the first quarter of the year, an increase of 27 per cent compared with the same quarter last year. Retail investment in gold was up 52 per cent, while jewellery was up 15 per cent, according to World Gold Council data.
The finance minister, P Chidambaram, is urging Indians against buying gold, blaming the yellow metal for much of the country's current account deficit woes. He has asked the banks not to promote the sale of gold coins.
"Gold is like any other metal, it only shines a bit more," he said, speaking at the annual meeting of the Indian Banks' Association this month.
On Thursday, he said that gold imports in the first half of May averaged US$135 million a day compared to $36m a day in the second half of the month.
Dimpesh Jain manages Motaba & Sons, a jewellery store in Mumbai.
"When the gold rate fell, we found that sales were very good," Mr Jain said. "Right now, because of the volatility again, the government raising import taxes, rates going higher, there's a big gap between India and other international markets. International tourists used to find India a relatively cheap country to buy gold. Now they find that Dubai and other places are cheaper."
The weak rupee, which tumbled to record lows against the US dollar in recent days, has also pushed gold prices higher in India. Steeper duties are passed on to customers, Mr Jain said.
As a result, he estimates that sales at his store are currently down by about 20 per cent compared to the same time last year. Some investors, meanwhile, have become wary following the sharp drop in gold prices, he added.
"The up and down is making investors think twice. People used to think of gold as a safe haven, but now they think it could [go into] a downfall or it could be a dead investment."
Still, he remains optimistic given gold's embedded role in society. "Gold has always been the backbone," Mr Jain said. "The measures will not change the mentality of people. Gold is not just a fashion. It's a custom. It's a must in Indian weddings."
R Sivakumar, who is the head of the fixed income group at Axis AMC, said that "over the long term, people have seen gold as an alternate currency.
"It's a hedge against inflation. It's a hedge against currency depreciation. Effectively, it's a way to protect a way to your savings. Indians are buying gold to hold for years, so they're not too worried about short-term declines."
He said physical gold was currently used in exchange-traded fund (ETFs), but there were hopes that in the future there might be the option of not having to import gold for the investments.
"The government is looking at measures to allow ETFs to use paper gold as underlying."
Praveen Jain, who runs a store called Fagniya Jewellers in Mumbai, said this his sales had slowed down. "Prices have come back up a bit because of the weak rupee," he said. "Customers are waiting for prices to go down again."
He said Indians often invested in gold as a way of making tax free profits and also as a means of laundering black money, as well as legitimate means of holding savings.
"In an underdeveloped financial system in India, gold has an important role to play," said Marcus Grubb, the managing director for investment at the World Gold Council.
"I think looking forward, as personal incomes continue to rise in India you're going to see more and more demand coming from that market."
