Gold To Fall On Monsoon Impact

With weather-related concerns beginning to take toll and international prices unrelenting, gold imports into the country are likely to take a beating in the coming months.



The Government, understandably, wants to play down the severity of adverse effect the prolonged lull in the South-west monsoon is having on kharif crops. Contingency plans are being put in place according to the Ministry of Agriculture. These measures will, no doubt, mitigate the hardship, but not contribute to higher output or better prices.

Going by the area already planted to various crops and possibility of further planting, it is becoming increasingly clear that the size of harvest in October will most certainly be not as large as it was last year- be it paddy, coarse grains, cotton or oilseeds.

Worse, international prices of many commodities are now beginning to fall.

Oilseeds and cotton are two ready examples. Softening global market is sure to have an effect on domestic prices of various crops. All this will translate to a decline in rural incomes during fiscal 2004-05.

The gold market is sure to be a casualty of slowdown in India's farm growth. Demand for gold in India is driven essentially by incomes and prices. The coming months may witness the double whammy of falling incomes and firm prices.

After falling below the psychological $400 an ounce mark, the yellow metal has resumed its upward march, encouraged by a weak dollar, rising interest rates and threat of inflation. Lingering geo-political concerns, although somewhat subdued but still very real, exert their influence too.

Experts have forecast a softening of global gold prices in the second half of the year; but on current reckoning, no signs are evident. At current prices, Indian import interest is sure to be rather subdued.

During fiscal 2003-04, India's gold imports aggregated in value approximately $6 billion, up from about $3.7 billion in the previous year, according to Ministry of Commerce data. This was the result of a sharp rise in rural incomes following rebound in farm output and producer-friendly commodity prices.

Some of the government agencies designated to import gold claim to have performed well in the first quarter of 2004-05 fiscal. This is not surprising at all, considering that gold prices ruled at $350-355/oz during April-June 2003; but were higher by 15-20 per cent during April-June 2004.

In the first quarter of last fiscal, gold imports were worth $1.7 billion.

Meanwhile, the recent circular issued by the RBI restricting the opening of letter of credit to nominated agencies and reducing the LC period to 90 days has irked many in the bullion trade. The directive is seen as an avoidable restraint on free trade.

Questions are being asked as to the provocation for issue of the directive and who the intended beneficiaries of the new dispensation are. Rather strangely, no one is talking about doing away with restrictions on gold imports as promised by the then Finance Minister, Jaswant Singh, early this year.

Gold imports, the FM had categorically stated, will be allowed to all persons under open general license, subject to RBI guidelines. More than six months after the announcement, the market is still awaiting the guidelines. The nominated agencies, meanwhile, are having a gala time.