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India Jewellery Market Outlook

 

2015 India Jewellery Market Outlook

Fundamentally, there is strong investment incentive in consumption of jewellery in India. Gold continues to be a dependable hedge against inflation and trusted store of value. Therefore, for as long as the pricing fundamentals and economic backdrop are gold positive, consumers will first consider gold above any other jewellery option.

Economic backdrop in 2015

  • lower interest rates 
  • lower inflation 
  • faster gdp growth

On one hand, India's economic outlook for 2015 is more positive than it was in the period 2012 to 2014. The abundance of economic good news seems likely to fuel an eventual recovery of the rupee vis-à-vis the U.S. dollar in 2015-2016. At the same time, the price of gold in international markets is expected to remain subdued in 2015-2016. These events should combine to send gold prices lower in local currency terms for the period 2015.

Our view is that the economic backdrop is not gold positive in the short term therefore we anticipate reduced appetite for gold as an investment. In theory, this should push gold demand lower.

On the other hand, the surprising plunge in oil prices helps narrow the current account and fiscal deficits. By extension, this has led to a broad-based decline in different inflation measures (CPI, WPI & GDP deflator).

With CPI inflation below the Reserve Bank of India's target (8 percent in January 2015), the bank has greater room to cut its benchmark repo rate by a greater margin. Without doubt, this is a further boost to India's growth outlook and the dividend will be higher investment flows into India.

The positive economic growth outlook could boost incomes for Indian consumers and this does help consumption of gold for important cultural occasions and festivals. In theory, this should push gold demand higher.

Nevertheless, in practice, India has just completed two straight years of very high gold jewellery demand because of one-off exogenous events.

In 2013, when the price of gold first plunged to levels last seen in 2010, consumers of gold jewellery in key markets quickly saw this as a buying opportunity and rushed to make purchases. Many reasoned that the dip in gold prices was an anomaly and therefore expected gold prices to return quickly to their long-term upward trajectory. However, this did not occurred and that is why investment demand for gold jewellery subsequently remained muted in China in 2014.

A similar situation was anticipated for India but the forced redemption of gold buying schemes, in compliance with new Companies Act regulations, actually led to another rush of gold jewellery purchases in 2014. Such instalment schemes are very popular in the market. First, they let consumers spread out purchases of higher priced gold jewellery pieces over many months. Second, they are also a lucrative investment for consumers since jewellers typically sponsor the last month or two of an instalment period.

Instalment schemes are estimated to make up to 25 percent of annual gold jewellery sales. However, new rules require redemption of outstanding gold buying schemes which were accepted before April 1, 2014, as and when they become due or before the 31st of March 2015 (whichever is earlier).

For the above reasons, 2015 could actually witness reduced demand for gold jewellery owing to consumer fatigue. In fact, our view is that consumption of gold jewellery could retreat by as much as 15 percent from 2014 levels. Gold consumption in 2013 and 2014 was substantially higher than the 546 tonnes annual average for the prior ten years.

For the last two years, consumption of gold positively diverted from trend in response to exogenous events and our assessment is that consumers will likely take time out to rebuild gold buying liquidity.

Add to this, new gold buying schemes consistent with new companies act rules are half as appealing as previous running gold schemes to retailers and their customers. The funding period is now limited to one year and the investment return cannot be in excess of 12 percent per annum. Some retailers have found creative ways to work around this but it will require at least the first half of 2015 for the industry to rearrange gold buying schemes.

In the final analysis, retail sales of precious jewellery could retreat 4.5 percent to reach 2,421 billion rupees (US$39.70 billion) in 2015. Greater sales of diamond jewellery will likely be offset by decreases in gold jewellery sales volumes at lower gold prices.

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