The discount on Indian domestic gold prices has widened to $23 an ounce (about 28 grams) against $3 in December due to weak demand amid sharp rise in gold prices.
Jewellers have been reluctant to restock as they face the twin challenge of holding high inventory and meeting payment terms with manufacturers.
This has created a liquidity crunch in the industry and widened the spread between domestic and international prices. In fact, domestic gold prices have been trading at a discount to international prices since December.
Subdued wedding buys
Kavita Chacko, Research Head-India, World Gold Council, said the rally in gold prices since the start of the year has weighed heavily on the retail demand for gold jewellery.
The demand dropped sharply in January and the weakness persisted into February. Wedding-related purchases too have been subdued, suggesting that many consumers had front loaded their purchases when prices dipped in November, she said.
Rather than making fresh purchases, many buyers are opting to exchange old gold for new jewellery. Also, as gold prices surged past previous thresholds, many consumers are also taking the opportunity to sell old gold and lock in profits.
The LBMA (London Bullion Market Association) gold price has surged by $286 an ounce or 10 per cent to $2,938 an ounce so far this year.
Imports down
Domestic prices have risen in line with international prices and jumped the same 14 per cent to a record ₹86,831 per 10 grams. The higher gains in rupee terms is attributed to the strengthening of the dollar against rupee.
Gold imports dropped to 30-35 tonnes in January owing to high prices leading the pull-back in demand. Imports in January were the lowest since last July. According to the Ministry of Commerce data, the gold import bill was down 43 per cent in January to $2.68 billion compared to December.
Prithviraj Kothari, Managing Director, RiddiSiddhi Bullions, said the discount on domestic gold prices will widen further if global prices continue to rise and domestic demand remains weak.
If Indian buyers resist purchases at elevated prices, the discount may extend to $30-$40 an ounce. However, seasonal demand from weddings and festivals, potential rupee appreciation, or import duty adjustments could help stabilise or reduce the discount, he added.
Dull outlook
Rural demand, a key driver of jewellery sales, remains sluggish due to inflationary pressures and lower disposable incomes. Jewellery demand may remain muted in the short-term, with buyers opting for lighter designs, 14 carat and 18 carat gold, and increased recycling of old jewellery, said Kothari.
