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Gold prices are likely to decline 10% further amid expectations of further appreciation in the rupee against the dollar and favourable policies after a stable government is formed at the Centre in coming days.
Speculations are rife that the National Democratic Alliance (NDA) - led government, as per various exit polls, will review import duty on gold which currently stands at an unaffordable level of 10% and also ease 80:20 rule under which at least 20% imported gold needs to be supplied to jewellery exporters. These hopes have brought down premiums on physical gold sales to a mere $15 an oz or Rs 300 per 10 grams.
"Currently, overall sentiment is bearish. However, pent up (heldover) demand is expected to emerge at lower level which will provide short term support to prices. The movement in the rupee will be a determining factor for gold price going forward," said Sugandha Sachdeva, Associate Vice President, Religare Commodities.
In fact, gold price started moving down in the rupee term in India despite slight jump in the dollar term overseas. Gold fell by 1.65% in the last two weeks from the level of Rs 30300 per 10 grams on April 28 to trade currently at Rs 29800 per 10 grams in Mumbai's popular Zaveri Bazaar. Analysts believe gold prices in the short term will fall to trade between Rs 27,000 - 27,500 per 10 grams. Interestingly, if the rupee strengthens further gold price will even fall below to hit Rs 26,000 per 10 grams.
During the last fortnight, the rupee appreciated 1.61% against the dollar to trade at 59.67 on Tuesday as against 60.64 on April 28th.
"The market now hopes for a stable government to come to power due to which the rupee is expected to appreciate which will cause gold prices to fall. If the rupee continues to appreciate due to the new government coming into power, gold prices will see a further drop," said Naveen Mathur, Associate Director (Currencies and Commodities), Angel Broking.
Owing to the elections as well, gold demand on the market is lower and also due to the restrictions on gold imports by the government last year to control current account deficit imports have seen a fall.
In April, gold imports have seen a fall to $1.75 billion in April, a fall of 74% compared to the same period last year according to data by ministry of finance.
The government had brought in the 80:20 rule and also hiked gold import duty to 10% and also banned the gold coin imports to control current account deficit (CAD).
However, now that CAD is under control, the government may consider easing gold import norms. If government relaxes gold import norms this will have a negative impact on prices and will cause prices to fall.
India is the biggest gold market in terms of consumption due to high demand for gold jewellery, which caused high foreign currency outflow. This had an impact on CAD and it stood at $ 88 billion in 2012-13, however, it fell to $32 billion in 2013-14.
Meanwhile, the government is also worried about smuggling of gold into the country through unofficial channels as imports were restricted. Through the unofficial channel, imports of gold in April was the increase in demand in the unofficial market resulted in the hawala market premium crossing four% from 2.75-3% a few days earlier and 2-2.25% a month before.
The premiums of gold on the spot market in Mumbai stand at $15-20 per ounce. Premiums started to see a fall as Akshay Tritya started to come closer and post Akshay Tritya due to lower demand on the spot market for gold it started to fall further.
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