Indian households may have accumulated up to 25,000 tonnes of gold, thereby retaining the tag of the world's largest holders of the metal, according to the World Gold Council (WGC).
"We conducted a study two years ago and found the household stocks at around 23,000-24,000 tonnes. Now, the stocks may have touched 24,000-25,000 tonnes," Somasundaram PR, managing director (India) of the London-headquartered WGC, told The Financial Express.
The value of this holding is roughly about 40% of India's nominal gross domestic product (GDP) in FY19.
WGC predicts 2019 Indian demand for gold at 750-850 tonnes, against 760 tonnes in 2018. "The strengthening of the rupee and the fall in local gold prices towards the latter part of the quarter triggered a rise in India's gold demand by 5% in Q1 [January to March] of 2019 to 159 tonne," Somasundaram told the daily.
But that trails a 7% rise globally in the same period. While gold demand has recovered from a seven-year low of 666 tonne in 2016 courtesy demonetisation, it is still far from the 963 tonnes posted in 2010.
Nonetheless, domestic demand is expected to further improve in the June quarter owing to traditional wedding season buying and the Akshaya Tritiya festival. Expectations of a normal monsoon this year also augurs well for the rural economy and gold demand.
Jewellery is reportedly likely to be main driver of Indian demand but the consumption of bars and coins is expected to be higher in 2019 than in the previous year. Although the government has experimented with multiple ways to reduce the domestic demand for physical gold, be it ETFs, SGBs, gold mining funds, gold fund of funds (FoF) or digital gold, the preference for physical gold does not wane.
Even its gold monetisation scheme (GMS), designed for those who have gold lying in lockers and cupboards, has failed to really take off. This is despite the interest rates in the range of 0.5-2.5% that one can earn, which is exempt from capital gains tax. The capital gains on value appreciation are also exempt from wealth tax and income tax.
The total mop-up through all the above-mentioned schemes - introduced as part of the government's broader efforts to curb non-essential imports and thereby contain trade deficits - reportedly represents a meagre 2% of the country's annual consumption. There were only 12 gold ETF schemes as of April 2019 with the total number of investors being 3,19,863. Moreover, the total AUM of gold ETFs has fallen by 60% between 2013 and 2019.
However, Arvind Sahay, Chairperson, India Gold Policy Centre sees silver linings. "The negative trend in gold ETFs seems to be reaching its trough," he told Business Today. "Given impending risks in the global economy, gold ETFs have the potential to see net inflows in FY20 after six years."
Sahay further suggests linking gold ETFs with GMS. He points out if fund managers could design the gold ETFs in such a way that the gold held by investors in ETFs could be moved into GMS, they would be in a position to significantly reduce the management fees for investors. "It would be an excellent move creating a win-win for the investor, funds and the economy," he added.
Edited by Sushmita Agarwal