Drought dents India gold demand; prices still appealing

New Delhi, September 11

Anantha Padmanabhan is offering deep discounts and giving freebies to attract customers to his gold bangle festival in southern India, but he is still struggling to sell in a region where monsoon rains were up to a third below normal.

Two straight years of drought in India — for only the fourth time in over a century — have hit gold demand in the world’s number two consumer and could cut imports by up to 10 per cent in 2015, said Padmanabhan, head of a regional gold federation.

Nearly two-thirds of India’s gold demand comes from rural areas where jewellery is a traditional store of wealth for millions who have no access to the formal banking system.

The planned launch of a sovereign gold bond that seeks to wean investors away from physical gold would further dent consumption, said Keyur Shah of Muthoot Pappachan.

Imports this year would have fallen well below 2014’s 891.5 tonnes but for weak world prices that are expected to still lure many price-conscious Indians into buying in the October to November peak wedding season, said Padmanabhan and fellow jeweller Nitin Khandelwal from rural Maharashtra.

“We started this bangle festival last year to do something different, and it was a big success,” said Padmanabhan. “But it’s very slow this year because of the chain reaction of weak rains. It’s going to be very tough.”

Sales at his three stores in Tamil Nadu state are down a quarter and southern India’s sales would drop to 80 to 85 per cent of last year’s levels, he said, although other parts of the country could show some resilience.

As well as jewellery, some farmers also invest in gold bars or coins. But KB Jadeja, a cotton grower in Gujarat, where rains have been 32 per cent below average in some areas, said he and his fellow farmers were not looking to buy any gold this year.

The other threat to gold imports is India’s move to mobilise idle metal stored in households. A government official said banks could pay higher-than-expected interest of 2.5 per cent on gold deposited in the scheme.

The deposited gold would be auctioned, used to replenish the central bank’s reserves or be lent to jewellers, and could cut imports by 20 tonnes annually.