India's imports of gold are taking a hit as prices have hit a record high – and industry experts say this in turn will affect flows from the UAE, the South Asian nation's second-largest source market for the precious metal.
“The gold price surge has dented consumer demand,” says Sachin Kothari, director at Augmont Gold For All, a gold refinery and bullion company based in Mumbai.
“Indian investors are not able to digest higher gold prices. Wholesale demand by jewellers has also decreased in March and April due to rising prices – therefore gold imports are expected to come down.”
Gold prices have risen globally, crossing $2,400 an ounce last week, amid geopolitical tensions as investors expect interest rate cuts by central banks later this year.
The UAE is the largest source of gold imports into India after Switzerland. The UAE accounted for almost 20 per cent of its gold imports in the quarter ending in December, according to the World Gold Council. Data from India's Ministry of Commerce shows that gold imports into India reached $35.95 billion between April and December last year.
The high prices will inevitably affect India's source markets including the UAE, says Colin Shah, managing director of Kama Jewelry and the former chairman of the Gem and Jewellery Export Promotion Council.
“April, May, June, you will see a dip [in gold demand in India],” said Mr Shah. He forecasts that imports from the UAE into India will halve in the quarter to June compared to the same last year.
Reuters has reported that India's gold imports fell by more than 90 per cent last month as steep prices hit demand.
This is particularly significant given that India is the world's second-biggest consumer of gold after China, with India's demand for gold standing at 745.7 tonnes last year, the World Gold Council's figures show.
Why UAE?
Gold is revered across India. It forms an important part of Indian weddings and it is still a way of storing wealth for many people. The lull comes despite it being generally a peak time of year to purchase gold, as India's wedding season is under way.
The UAE has become an important supplier of gold due to its role as a hub for the precious metal, mined from countries including Zimbabwe, Russia, Mali, and Ghana. India also imports gold from Saudi Arabia, which accounts for about a 1 per cent share of total gold flows into India, according to the World Gold Council. But the UAE plays a much more significant role in the global gold trade, and in India's purchases of the precious metal.
“The biggest reason is that UAE has built a very nice ecosystem for all the bullion dealers, who operate through Dubai for a variety of reasons, with taxation being the biggest one,” said Mr Shah.
“Most of the large refiners are either routing their gold through the UAE, or are refining in the UAE.”
“The supply comes from across the world, but most of the trading companies are based out of Dubai,” says Naveen Mathur, director, of commodities and currencies at Anand Rathi Share and Stock Brokers in Mumbai. “The miners, the suppliers have their presence there.”
With the UAE dirham pegged to the dollar, that makes trade much easier for gold suppliers worldwide which typically operate in dollars, he says.
Another factor that has helped increase the appeal of the UAE to India is an import duty cut of 1 per cent under a Comprehensive Economic Partnership Agreement between the two countries, which came into effect in 2022. This reflects the two nations more broadly expanding their trade ties, to double their non-oil trade to $100 billion by 2030.
“Instead of the standard 15 per cent duty, Indian importers can import gold from the UAE for a 14 per cent duty”, says Mr Kothari.
This has been “a major factor that has been prompting these imports”, says Kavita Chacko, research head, India, at the World Gold Council.
Lacklustre demand
Gold is typically bought in the form of jewellery, bars, and coins. Higher demand for the precious metal is usually married to the months of October to December and April to June, deemed as the ‘wedding seasons’ in India.
“Anecdotal evidence suggests that both rural and urban centres have experienced a broad-based drop in demand despite the ongoing wedding season. It appears that jewellers and consumers alike are awaiting a price correction before they add to their stock.” says Ms Chacko.
Price hikes over recent months compounded by this months ongoing new records will further dampen India’s gold demand in the months to come, she adds.
While India over the past couple of years has been importing around 700 to 800 tonnes of gold, “we expect the imports to be in the lower range of this estimate this year mainly due to record higher prices that gold has touched and also slowdown due to trade restrictions due to impeding general elections”, she says.
But she adds that “we expect the overall percentage share of gold imports from UAE to be similar to last year”.
General elections in India are due to begin on Friday and will continue until early June.
“During the general election period for the next two months, there will be heightened scrutiny on the movement of gold and cash,” says Sachin Jain, regional chief executive, India, World Gold Council. “Except during festivals, gold jewellery demand will likely remain subdued during a large part of the second quarter, even if prices moderate over the coming months.”
But Mr Shah says he expects to see a pick up in gold demand immediately after the election.
“Whenever there is an unprecedented spike in the gold price, once the price stabilises, it's business as usual again,” says Mr Shah.
The medium to longer-term outlook is also bright for the gold trade relationship with the UAE, he says, because its proximity to India makes it an increasingly attractive market to import the precious metal.
“The freight cost is lower than say importing from Switzerland,” says Mr Shah. “As the cost advantages become more significant amid high gold prices and freight costs, “I think there will be more and more gold imported through the UAE.”
