Fall in gold prices not yet a concern for rupee: Nomura

MUMBAI: The falling gold price is unlikely to increase consumer demand and add pressure on India’s current account deficit or the rupee, brokerage house Nomura said.

The correlation between gold prices and gold demand in India had turned from negative (that is, when the price falls, the demand increases) in the pre-crisis years to positive (both move in the same direction) since 2009, it said. This change in correlation is attributed to a number of factors, including a growing preference for gold as an investment asset, rather than for consumption as jewellery.

In the past years, lower inflation, improved central bank credibility and strong performance in financial assets have diminished gold’s appeal as an investment, Nomura said. In the 12 months to end-June, an investment in the Nifty index would have yielded more than 11% in total return. Gold in rupee terms has lost 6% in the same period.

More recently, trade data show weakness in gold demand, with import volumes dropping 21% month-on-month in June by Nomura estimates. This is attributed to factors such as low demand during the monsoon season.

India sources most of the gold it consumes through imports. If the demand for the metal increases, the country will have to spend more foreign exchange to pay for imports and that will hurt the current account deficit and put pressure on the local currency. But Nomura’s prediction suggests that it is unlikely to happen this time.

Also, anecdotal reports suggest ample inventory among dealers, accumulated in anticipation of the end-of-year wedding season and due to poor consumer demand. With rural consumers accounting for most of the purchases, a decline in agricultural wage growth is likely to be a factor in the weakening demand, the brokerage said.