Credit: Shutterstock photoFriday June 14, 2013 2:17 PM
(Kitco News) - The Indian government and the Reserve Bank of India are not expected to announce any new initiatives to curb gold demand; however, the government continues to dissuade citizens from buying the yellow metal.
At a news conference on Thursday, Indian Finance Minister Palaniappan Chidambaram said that it was wrong to assume that gold was the safest investment and that he was happy his appeals are being heard.
Chidambaram added that he hopes demand remains low so the country doesn't have to import gold for a year.
The government and the central bank have been targeting gold imports as a way to lower the country's massive current-account deficit.
Although earlier in the week the government said it wouldn't introduce any new measures to halt gold imports, Chidambaram left the door open for further moves.
"I hiked the duty a few days ago. I don't want to become unpopular. We will see," he said.
Along with the central bank's restrictions on gold imports and the government's tariff increase to 8% from 6%, consumers will have to face another hurdle - a significantly weaker rupee.
The country's weakening currency is expected to continue to dampen Indian demand for gold. The rupee weakened earlier this week to 58.978 rupees to the U.S. dollar, which some analysts say is an all-time high for the greenback against the Indian currency. The rupee has since recovered some of its losses to 57.618 as of 2:15 p.m. EDT, although it remains several rupees weaker than 53.70 as of May 1.
Neil Mellor, currency strategist at the Bank of New York Mellon, said that he expects the rupee to continue to decline. He added the country's current-account deficit and weakening economy does not provide great prospects for the currency.
"It's the worst-performing currency in the EM world," he said.
Rich Ilczyszyn, senior market analyst at iiTrader.com, said the weak demand outlook in India adds to the bearish case for gold; however, he pointed out that demand for gold will always be relatively strong in India and China.
"The week rupee makes it's a little bit more difficult but I don't think it will stop people from buying gold," he said.
Although physical demand has played an important role in the maintaining gold prices , Ilczyszyn said that its impact will lessen over time. Even if Indian demand remains strong, he said that investor demand will be the most important factor if prices are going to break their current downtrend.
"Right now I think gold is stuck between a rock and a hard place and I don't see prices going up in the short term," he said.
The RBI will meet on Monday to discuss its monetary policy. Although inflation has fallen below the bank's target of 5%, analysts are not expecting a cut in interest rates because of the significant drop in the rupee.
"Because of the weak currency, the central bank won't be able to cut rates and they won't be able to stimulate the economy," said Mellor.
Read the latest news in gold and precious metals markets at Kitco News.
By Neils Christensen, with contributions from Allen Sykora of Kitco News nchristensen@kitco.com andasykora@kitco.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
