Gold Imports Remain High Despite Positive Real Rates

Gold imports and real policy rates broadly share an inverse relationship (see chart). In the past, when real policy rates became positive, bank deposit rates became more attractive and investors parked their money in banks, reducing the lure of gold. But things seem to be different this time around, because gold imports as a percentage of the gross domestic product (GDP) have not fallen, even though real rates have ticked above zero.

One reason could be that consumer price inflation remains high. Consumer price inflation was slightly lower at 9.31% for May, suggesting that lower input costs are not being passed on to the consumers though growth is weak, thus keeping inflationary expectations high.

Also, monetary transmission of interest rates has been slow. The Reserve Bank of India (RBI) has cut rates by 125 basis points in the past year. However, banks have cut their base rate by only 30-40 basis points. One basis point is 0.01%.

It is not surprising that even credit growth has remained sluggish at 14.6%, as of 17 March. To buttress credit growth, banks may bring down their deposit rates once liquidity eases and RBI cuts interest rates further. But the central bank must ensure that real interest rates remain high, otherwise a rate cut may further buoy demand for the yellow metal.

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Another factor spurring higher gold imports recently is prices. Gold prices in rupees have corrected 17% from a high of Rs.32,460 per 10 gram to Rs.27,731 as of Wednesday. Kishore Narne, analyst at Motilal Oswal Securities Ltd, said that after 10-12 years they were seeing a major correction in gold prices and a lot of people who had postponed their purchases are buying the precious metal now.

There is another reason for high gold imports. Analysts say that businessmen and wealthy individuals, who were parking a lot of unaccounted-for money in real estate, are also moving to gold. The real estate sector is in trouble and inventory is high. Real estate as an investment avenue is losing its sparkle. The only option for investors is gold, said an economist who did not want to be named.

After strong demand for gold in April and May, gold imports may decline because of the hike in import duty and tightening of regulations by RBI. But as the chart shows, the key factors are high real rates on deposits and the direction of gold prices.



Source:-www.livemint.com