Import restrictions and the rival appeal of equities have put a damper on India’s gold market, traditionally the world’s biggest. As festival season gets under way and Indians indulge their craving for the yellow metal, many are wondering when New Delhi and the Reserve Bank of India will begin rolling back their efforts to keep the market in check.
Officials are particularly concerned about the effect of gold imports on India’s troublesome current account deficit. One way round that problem would be to encourage more recycling of gold already in India. It could also be an enticing business proposition.
By Akshay Mathur, Gateway House: Indian Council on Global Relations
The New Development Bank launched this week in Brazil by the leaders of the Brics countries – Brazil, Russia, India, China and South Africa – is to boost infrastructure and sustainable development projects through loans, guarantees, credits and equity investments.
But the bank’s establishment also enhances another key geoeconomic ambition of the Brics: to conduct more trade in local currencies, thereby diluting the dominance of the US dollar. Already, there is plenty of evidence to underscore the vitality of this ambition.
Arun Jaitley, India’s finance minister, unveiled a maiden budget on Thursday which failed to excite stock market investors but made several pledges for reform which – if they are implemented – may coax future efficiencies out of an economy burdened by red-tape, corruption and opacity.
The budget outlined plans to raise foreign investment limits in defence and insurance, overhaul India’s US$43bn subsidy regime, and simplify its archaic tax system to make it more transparent and bolster revenue growth. That, the government expects, will help raise growth from last year’s level of about 4.6 per cent.
However, investors did not get the “big bang” reforms that many were expecting, sending the benchmark Nifty equities index down 0.2 per cent in the day to 7,567.75. Nevertheless, there was much in Jaitley’s budget to suggest optimism.
As the pro-business Narendra Modi comes to power in New Delhi with a powerful popular mandate, investors are hoping for an economic turnaround and some hard-hitting policy reforms.
So there was plenty of interest when the Reserve Bank of India (RBI), the central bank, released its half-yearly financial stability report late on Thursday. Its conclusions are not all rosy for Asia’s third largest economy.
The violence in Iraq has put the nation’s oil exports at risk, prompting a rise in global oil prices.
For India, which relies on imports for over 75 per cent of its oil and gas needs, that could spell trouble – especially as a new government takes over in New Delhi, eager to control India’s fiscal and current account deficits while maintaining popular support.
Recent optimism in financial markets about India’s prospects isn’t all driven by pre-election elation. Investors have been cheered by headline improvements to economic fundamentals and at the heart of that positive sentiment is the balance of payments.
It’s something the incumbent government is keen to flaunt. But take a closer look and India’s external balances don’t look quite as good as the headline figures suggests.
On Monday, India’s gold industry went on strike, a symbolic protest against government efforts to curb official imports and limit smuggling of the yellow metal.
The strike has added to pressure on New Delhi to roll back recent hikes in duties and quantitative restrictions on gold imports, which are crippling the trade. But what will happen when a new government comes into power following this year’s general election?
Restrictions on India’s gold imports will be reviewed by the end of March if concerns over the country’s external balances ease up, India’s finance minister, Palaniappan Chidambaram, said on Monday.
As the second largest gold importer after China, any shift in India’s import policies could have an influence on world markets. However, much depends on how policymakers judge their progress in bringing down the current account deficit.
After the Argentine peso depreciated sharply at the end of last week, talk has begun of a wider EM rout. Once engines of growth for the global economy, emerging markets are now seen as vulnerable with signs of weakness emerging in the Chinese economy and the US Federal Reserve reeling in its asset purchase programme, adding to domestic woes.
While the spotlight was on Argentina on Friday, how unstable are markets in India?
When the Reserve Bank of India put out its latest statement on the nation’s current account deficit on Monday it looked like good news.
The gap narrowed to $5.2bn, or 1.2 per cent of GDP, in the three months to September from $21.0bn, or 5 per cent of GDP, in the same period a year earlier. But are these numbers simply a mirage?
It’s official. India believes a government led by Narendra Modi, the contentious prime ministerial candidate for the opposition Bharatiya Janata Party, would be a blessing for the economy. At least, so says Goldman Sachs.
In a note to clients on Tuesday, analysts at Goldman increased their target for the Nifty index at the end of 2014 to 6,900 points. The benchmark index is currently trading around 6,240 points.
Earlier this year, Goldman had a cautious view on India. But the Nifty has gained 30 per cent since the end of August and the bank has good reason to raise its investment outlook.
In the fourth part of our series on gold in India, beyondbrics asks why sales of the precious metal were so subdued before this month’s Diwali festival – usually a peak season.
See also part one, jewellers in a desperate spot, part two, gold loans on the up, part three, the story in charts, and from FT Analysis, India: Part of the fabric.
In the third part of the beyondbrics series on India and gold, we tell the story of the country’s obsession in seven charts.
[See also the FT analysis: India: Part of the fabric; beyondbrics series part 1, the jewellers in a desperate spot; and part 2, the growth in gold loans.]
In the second part of a beyondbrics series on India and gold, we look at the surge in gold loans – a market that highlights the country’s obession with the metal, and serves to reinforce demand.
See part one: India’s jewellers in a desperate spot. Coming on Friday: India and gold in charts.
What can India do about its gold habit? In the first part of a beyondbrics series, to accompany the FT’s Analysis of India and gold, we look at the impact of recent measures to curb the country’s gold appetite on the jewellery industry.