India is the largest gold jewellery consumer globally, after China. Despite high prices, Indian gold buyers showed huge enthusiasm to purchase jewellery on Akshaya Tritiya, an auspicious ocassion for ornaments purchases in April 2023. However, a sustained rally in gold prices gradually dampens the demand.
Although gold prices have corrected now from their recent highs, it is trading at elevated levels. Such inflated prices can brighten the revenue of organised gold jewellery retailers, but the volume growth may start moderating.
A CRISIL Ratings study of 46 gold jewellery retailers, comprising nearly 25 percent of the organised jewellery sector revenue, indicates this. According to the study, revenue of organised gold jewellers is expected to rise 16-18 percent in FY24, however volume growth could be minimal - upto 5 percent. The organised sector accounts for about one-third of the industry, with the highly fragmented unorganised sector making up the rest.
Increase in penetration of goods and services tax, mandatory hallmarking, rising disposable income and changing consumer preferences in terms of jewellery designs are nudging market share towards organised players. Store expansions this fiscal may lead to higher inventory requirement and increased working capital debt.
According to RBI, the gross bank credit to the sector had declined 3 percent over the 12 months through March 2023 as players rationalised inventory across stores and generated healthy cash.
Why are gold prices volatile?
The yellow metal's prices are volatile as it is a finite commodity. It is mined in limited quantities and hence an increase in demand drives its prices. Domestic price of gold increased by nearly 10 percent last fiscal, averaging Rs 52,700 per 10 gm (24-carat) and reaching Rs 60,000 per 10 gm by end March 2023. The price further inched up to an all-time high of Rs 61,500 per 10 gm during May 2023, as the yellow gold kept its shine as one of the safer investment options amid an uncertain global economic outlook.
Along with high demand, another reason for the rise in prices of international gold is the US Fed policy action, which is decided considering inflation. The US Federal Reserve in its recent
meeting on June 14th kept the rates unchanged, but signaled two hikes this year. In effect,
international gold prices hit a near three-month low on June 15th. Gold in the international market fell to $1,945 per ounce dragging prices in India lower as well. The Fed, in new economic projections, signalled that a stronger-than-expected economy and a slower decline in inflation will result in a likely rise in borrowing costs by another half percentage point by the end of this year.
That said, sharp volatility in gold prices, changes in government regulations and import duties, as well as consumer sentiment, will bear watching.
