With the economy gradually normalising, the strong momentum in gold imports is expected to continue, leading trade deficit to widen further, Acuité Ratings & Research said.
The credit rating agency (CRA) has forecast current account balance (CAB) to register a deficit of $38 billion in FY22 from a surplus of $24 billion in FY21.
CAB is the difference between the sum of exports of goods and services as well as income receivable, on the one hand, and the sum of imports and income payable on the other.
Acuité Ratings highlighted the significant rise in gold imports, which rose to a decade high level of $23.9 billion in H1 (April-September) FY22, clocking a growth of 253.6 per cent year-on-year.
Revival in business
Suman Chowdhury, Chief Analytical Officer, Acuité Ratings, opined that the release of the pent-up demand following the easing of lockdown restrictions and re-opening of retail outlets, the revival in consumer sentiments due to the steady progress in vaccination, the declining risk of a third Covid wave along with re-stocking of inventories ahead of the festival and wedding season have led gold imports to surge in FY22 so far.
The mild correction in domestic gold prices by 2.7 per cent from the peak seen in May-21 has further provided a fillip to domestic gold demand.
In this regard, the CRA referred to a World Gold Council estimate, whereby for every 1 per cent fall in the gold price in any given year, gold demand increases by 1.2 per cent.
Chowdhury observed that it is also likely that a part of the increased household savings in the higher income categories are being partly deployed in physical gold as it has been traditionally considered to be a safe haven in an environment where the risks of the pandemic continue to exist.
Additionally, investors may have also started to diversify their asset portfolios by redeploying the profits from the equity markets in bullion.
Recovery in exports
“Another factor which has also contributed to the rise in gold imports is the recovery in exports of gems and jewellery, with strong demand from countries such as US, Hong Kong and UAE.
“The outbound shipment of gems and jewellery has increased to its pre-pandemic level and stood at about $3.4 billion in September 2021,” he said.
The agency noted that the cumulative exports in the first half of FY22 at $19.3 billion have already touched the levels seen in first half of FY20 after reducing to less than half in the previous year.
The proposed free trade agreement with the UAE can further result in enhanced exports of gems and jewellery over the medium term, it said.