How Gold's Fall Will Affect World's Biggest Consumer
With gold accounting for a hefty portion of India's import bill, the world's top consumer of the precious metal will likely be the biggest beneficiary of the steep fall in prices, said economists, a day after gold had its biggest one-day drop ever.
"India is almost certainly the biggest beneficiary of the decline in gold prices - particularly due to it's impact on the country's current account," Robert Prior Wandesforde, director of Asian economics at Credit Suisse told CNBC on Tuesday.
Overwhelming demand for gold in India has contributed to a sharp rise in imports widening its current account deficit to 6.7 percent of gross domestic product in the last three months of 2012.
Given high levels of inflation in Asia's third largest economy, gold - which made up 11 percent of total imports in 2012 - is widely used as a hedge against rising prices. It is also traditionally gifted during weddings and religious occasions.
But this violent fall in gold prices could begin to dent demand for the metal as sentiment turns bearish, according to Barclays economists Siddhartha Sanyal and Rahul Bajoria.
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"The surge in gold import demand in recent years has remained mostly speculative in nature. This means that in the case of a downward trending price, not only would the gold import bill likely decline, volumes could also decrease," said the Barclays economists in a report.
Gold demand in the country has already begun to show signs of moderation this year after the government hiked import duties on the precious metal twice last year and once in January. Imports of the precious metal declined by almost 24 percent to 200 tonnes over January to March, from the same period a year earlier, Reuters reported.
The bank estimates that if gold prices hold around $1,400 an ounce, India's net import bill for the precious metal could fall by almost $7 billion in the fiscal year ending March 2014.
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If together with gold at around $1,400, oil were to stay at $100 a barrel, it could wipe off about $20 billion from the current account deficit narrowing it to $66 billion or around 3.2 percent of GDP for the current fiscal year.
"We have also not factored in any drop in other metal prices, such as copper, palladium, silver, which could increase the benefits to the current account," they said. Alongside the tumble in gold, silver prices have also pulled back significantly, declining 14 percent over the past week.
Positive for Monetary Policy
The overall decline in commodity prices, if sustained, will improve the prospects of further monetary easing, added Prior Wandesforde.
"The RBI [Reserve Bank of India] has been paying increasing attention to the current account deficit - there was a terrible number in December. If we get more evidence of the trade position improving, and inflation falling, we could get a [rate] reduction in June," he said.
The RBI is due to hold its next monetary policy meeting on May 3, where expectations are growing that it will cut interest rates by 25 basis points to 7.25 percent. The next meeting following this is expected to be held in June.