Why has India’s gold demand declined in April-June quarter?

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In the second quarter of 2023, the demand for gold in India fell by 7% from last year, according to a report by the World Gold Council. Here are the factors that led to this.

India’s gold demand dropped to 158.1 tonnes in the April-June quarter of 2023 from 170.7 tonnes in the same quarter of the previous year. The decline was seen both in demand for jewellery and investments during the period. The quarter also witnessed a slowdown in buying from central banks, including the Reserve Bank of India (RBI).

How much has gold demand fallen in April-June?

In the second quarter of 2023, the demand for gold in India fell by 7 per cent from last year, according to a report by the World Gold Council (WGC). The gold demand value in Q2 of 2023 was Rs 82,530 crore, an increase of 4 per cent in comparison with Rs 79,270 crore in the April-June period of 2022.

Total jewellery demand in the country dropped by 8 per cent to 128.6 tonnes from 140.3 tonnes. The value of jewellery demand was Rs 67,120 crore, up 3 per cent from Rs 65,140 crore in Q2 2022.

The investment demand for gold, which is driven by safe-haven appeal and the ability to convert into jewellery at a later stage, dipped to 29.5 tonnes in the period compared with 30.4 tonnes in the year-ago period. In value terms, gold investment demand was Rs 15,410 crore, up by 9 per cent from Q2 2022 (Rs 14,140 crore).

So, what led to this slowdown in demand for gold?

According to World Gold Council’s Regional CEO (India) Somasundaram PR, the demand for gold jewellery in India dropped due to the prevailing record high rupee gold prices, which significantly impacted affordability and consumer sentiments.

In Q2 2023, the average gold price increased by close to 12 per cent at around Rs 52,191 per 10 grams (excluding duties and taxes) from Rs 46,430 per 10 grams in the same period of 2022. In January-March 2023, the average gold price was Rs 49,977 per 10 grams.

Did the Rs 2,000 note withdrawal impact the demand?

On May 19, the RBI announced the withdrawal of the Rs 2,000 banknote from circulation, while maintaining its legal tender status. The RBI has set a deadline of September 30, 2023 to deposit or exchange Rs 2000 banknotes. Post the announcement, there was some panic buying of gold by using the Rs 2,000 notes.

“There was a brief but notable impact on gold demand following the knee jerk reaction to the ban of Rs 2,000 notes during the quarter,” said Somasundaram.

He, however, feels that, unlike 2016’s panic buying after the demonetisation, a similar situation is unlikely to arise. This is due to stringent government oversight in place.

So, how much gold has the RBI bought in April-June?

In April-June 2023, the RBI bought 10 tonnes of gold compared with 15 tonnes in Q2 of 2022. At the end of June, the RBI’s gold reserves stood at 797.4 tonnes.

The WGC report said following a record-breaking start in Q1 2023, central bank gold demand slowed significantly in Q2. Global net purchases totalled 103 tonnes between April and June, down 35 per cent as compared to 158.6 tonnes in the same period of 2022.

The slower demand by central banks was primarily driven by net sales in Turkey due to its political and economic circumstances.

“Having been a leading buyer throughout most of Q1, the Central Bank of Turkey (TCMB) abruptly flipped to being a significant net seller in March. Selling continued in April and May before purchasing resumed in June – resulting in net Q2 sales of 132 tonnes,” the WGC report said.

What is the outlook on India’s gold demand?

“Looking ahead for the rest of the year, we remain cautious about gold demand as it faces uncertainties due to elevated local prices and a slowdown in discretionary spending,” said Somasundaram.

However, the success of the monsoon season could bolster sentiment ahead of the Diwali season and throw positive surprises. With H1 2023 demand at 271 tonnes, the estimate for full-year gold demand is in the range of 650-750 tonnes in 2023, he said.

Source: Indian Express