Why have gold imports surged to two-year highs?

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India’s gold imports hit record highs in March 2021, propelled by a decline in prices and higher demand during the ongoing wedding season.

According to Reuters, India’s gold imports in March surged 471% year-over-year to 160 tonnes. Overseas purchases witnessed more than sevenfold increase to 98.6 tons from 13 tons during the period under review.

Reportedly, imports during the first three months of 2021 also have more than doubled in the Asia’s third largest economy, which is consumer to about 190 tons of gold.

As per the preliminary export-import data released by the government, the gold imports in March 2021 stood at $8.4 billion, highest monthly tally since 2012-13, when the imports hit a decadal high. This is also much higher than the $1.23 billion imports in the year ago period.

In February, government had slashed import duties on gold to 10.75% from 12.5% to boost retail demand and curtail smuggling into the South Asian country.

Many consumers had also postponed their purchase amid higher prices seen in August 2020. Gold prices in February and March slipped 20% from the August 2020 highs. Following the correction, the demand for the yellow metal surged.

According to experts, investors are also responding to the negative real interest rates by choosing gold over other instruments. Negative real interest rate means that the inflation rate is greater than the nominal interest rate.

It may be recalled that the RBI has kept the reverse repo rate at 3.35%. Savings account interest rate at SBI has declined to 2.7%, while one year term deposit rates is around 5%.

Higher imports by the world’s second-biggest bullion consumer could support gold prices, which is visible in the gradual rise in prices over the last two weeks.

However, the surge in imports could increase India’s trade deficit and pressure the rupee, yet at the same time, the second wave of Covid, fresh restrictions in states like Maharashtra, which houses the biggest bullion market in the country may cap the demand over the next fortnight in this region.

Anuj Gupta, VP, Commodity and Currency Research at IIFL Securities said, “Gold imports have surged  at 2 year highs as investment demand increased amid uncertainty due to the rise in coronavirus cases. As Indian imports have surged almost 471%, it indicates that the demand of jewellery and demand of coins and bars has gone up. We expect the demand for physical gold to increase due to the ongoing marriage season and festive season of Ugadi, Gudi Padwa, Chaitra Navratri, Baisakhi and also the upcoming Akshay Tritiya.”