India’s decision to sharply raise import duties on gold, silver and other precious metals has triggered fresh volatility across jewellery stocks and reignited the debate around gold consumption, investment behaviour and the country’s external vulnerabilities. The move comes at a time when rising crude oil prices amid escalating tensions in West Asia have intensified pressure on India’s foreign exchange reserves and weakened the rupee, prompting the government to introduce measures aimed at curbing non-essential imports.
Prime Minister Narendra Modi has also appealed to citizens to reduce gold purchases and adopt fuel-saving practices as part of a broader effort to conserve foreign exchange.
In an exclusive interview with BW Businessworld, Joseph Thomas, Head of Research, Emkay Wealth Management discusses whether higher duties can alter India’s deep-rooted affinity for gold, the growing appeal of ETFs over physical jewellery, the outlook for organised jewellery players and whether the current macroeconomic environment strengthens the case for adding gold to investment portfolios.
Edited excerpts:
Will higher import duties fundamentally change how Indians invest in gold?
Import duties are not going to change the way we invest in gold or our approach to investing. The duties imposed on the import of gold is a temporary measure, and it is intended to discourage purchases from abroad in the short to medium term.
The annual spends on gold and silver stands at USD 80 to 90 billion, and it needs to be curtailed given the current market conditions- the weak Rupee, the expensive oil and the lack of inflows into the country through investments. Even if the prices go up, those who need gold for very essential consumption may still go in to buy. But the higher duties are a good deterrent.
Gold ETF inflows surged 34 per cent in April to over Rs 3,000 crore despite elevated prices. Is this signalling a behavioural shift among investors?
See, these are open-ended funds which you can invest into and liquidate freely and more convenient than physical gold dealing. The inflows attracted by the ETFs have been based on two basic factors. A view of the gold prices, and a two-inference on the Dollar-Rupee movement. Both these factors were conducive to further gold investments. Also, the equities were going nowhere, and it was volatile too. All these factors prompted people moving into ETFs.
Can jewellery demand slow sharply if gold prices rise another 10-15 per cent after the duty hike?
Demand generally does not come down with rise in prices. The impact could be the reverse too. If there are expectations of a further rise in prices, then demand may pick up as the market moves in expectations. But in the immediate term the demand may gradually start slowing down.
Rising crude prices, geopolitical tensions and rupee weakness are historically bullish for gold. Does this strengthen the investment case for ETFs over jewellery?
The investment proposition for gold has been very strong since the last two years. It still continues to be. But one should not lose sight of the fact that the fundamental factors that were driving the prices higher were the fall in the US interest rates, and the consequent weakness in the USD.
However, with the war in the Middle East and the rise in oil prices has led to inflationary pressures both in the US and elsewhere. This may delay further reduction in US rates. And this may impede further rise in gold prices in global markets in the near-term. This primarily affects and much less the jewellery demand.
How vulnerable are jewellery stocks to prolonged weakness in discretionary spending?
There has been some correction in Titan and Kalyan Jewellers. This was in response to the duty hike and the fears of a weak consumer demand. But we have two sets of players in this market, the organised and the less organised or unorganised. The first group will not get affected much during this phase. The organised players have also reported good results in the last two quarters. Also, organised players have the advantage of sales and store network and also of branding.
However, there is no scope for a longer valuation reset at this juncture because the factors prompting such a reset are absent. Therefore, selective investments in the organized segment may be preferred.
Will the government’s appeal to reduce gold buying actually work in India’s cultural landscape?
It was an appeal by the PM to the people, but it was followed up with a quantitative action of raising the duty to a higher level. Such things do work in India, as mentioned earlier, these are all tentative measures and not for the longer-term. Therefore, there could be a lot of people who would defer the purchases for a while.
Is this the right time for investors to add gold to their portfolios for diversification? How much gold allocation is ideal in the current macro environment?
As far as investment portfolios go, the standard allocation to gold is somewhere around 10 to 15 per cent. This allocation can be done at any point in time either through a lumpsum investment or through the SIP route. At this juncture, the current bullish phase in gold is almost two years old, and going by technicals or charts the current phase has another two or three years for this up move to mature.
Central bank demand has also been very strong for the last three years, and it may remain so with gold emerging as a possible, though limited, replacement for the Dollar.
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