Relax, India's Massive Gold Imports Likely a One-Off
The recent plunge in gold prices has further whetted the appetite of gold bugs in India, with imports into the world's largest consumer of the precious metal surging 138 percent in April, widening the already ballooning current account and trade deficits.
But, economists say this whopping increase in gold purchases could be a one-off as consumers take advantage of lower prices not seen in two years. Demand could also have been driven by the wedding season and a popular Hindu festival in May together with banks rushing to import gold before the implementation of certain restrictions.
"We don't consider this development particularly alarming. We in fact expect a sharp contraction in the import bill in the coming months as the gold-related one-off fades on one hand and a weak economy keeps other imports in check on the other hand," Taimur Baig, chief economist at Deutsche Bank wrote.
Gold imports surged 138 percent year on year to $7.5 billion in April, sending the trade deficit to $17.8 billion, up more than 72 percent from March. The yellow metal accounts for around 11 percent of the country's overall imports.
Over the past year, the Indian government has stepped up efforts to moderate gold demand. In January, it raised the import duty on gold to 6 percent from 4 percent to curb imports, following two hikes in 2012. These duties together with a slowing economy have had limited impact on denting gold demand as it is still seen as a reliable store of wealth.
Following the release of the April data, the Reserve Bank of India (RBI) on Monday brought into effect previously announced curbs on banks importing gold.
(Read More: 3 Reasons Why Gold Won't Fall Through the Floor)
Under the restrictions, banks can no longer import gold on a consignment basis - an arrangement where lenders can hold stocks of gold without actually paying for it until they find a buyer for it - which means they would now have to put it on their balance sheets upfront. And this is expected to be effective in tempering imports, say economists.
"The recent curb imposed by the RBI, unlike the import duty hike to 6 percent, coupled with moderating prices would help contain gold imports," said Rohini Malkani, economist at Citi.
The bank estimates gold imports will fall to $43.5 billion in the current fiscal year ending March 2014 from imports of $49.2 billion estimated for the previous year.
Citi forecasts India's current account deficit will narrow to 4.1 percent of gross domestic product (GDP) or $85 billion in the current fiscal year compared with 5.1 percent or $95 billion last year, helped in part by a decline in gold imports and lower oil prices.
(Read More: How Gold's Fall Will Affect World's Biggest Consumer)
Investment Demand to Temper
Going forward continued weakness in gold prices could lead to a fall in investment demand in India, says Sonal Verma, India economist at Nomura as there has been a positive correlation between gold prices and investment demand since 2009.
Investment demand, that includes purchases of gold coins, bars and ETFs, accounts for 25 percent of overall purchases.
"Hence, the recent fall in gold prices suggests that gold import volumes should moderate this year," Verma said.
By CNBC's Ansuya Harjani