NEW DELHI, Aug 4: Gold prices are likely to rise sharply in the short-term as Reserve Bank’s recent liquidity tightening measures have made other investment options like stock and bonds less attractive, experts have said.
Gold prices are already moving fast to the key level of Rs 30,000 per 10 gms ahead of the busy marriage and festival season. The rates in the national capital on Friday rose by Rs 450 to Rs 28,800 per 10 gms.
Market experts also noted that global rates, which profoundly influence domestic prices, are on firming trend, too. The translational cost due to depreciation of rupee will also make the precious metal dearer, they added.
To arrest steady fall in rupee, earlier this month the Reserve Bank of India under the liquidity adjustment facility had made MSF rate 300 basis points above the policy repo rate, resulting in bank rate raising to 10.25 per cent.
RBI measures like a hike MSF (Marginal Standing Facility) had “triggered a series of events impacting the bottom line of safe investors–country’s core investment populace”, experts said, adding that investors are likely to park their money in gold now, considered safer than stocks and bonds.
“Overnight, investors in safe havens lost 5-7 per cent across the board. In an already faltering economy, this move may have triggered an event that has been blamed for falling rupee — our appetite for gold. The fallout of this action may push Indians to the only option they understand– gobbling gold,” said Samar Vijay, Director of InvestCare.
The fall in the markets during the week has come about despite good gains in global markets, indicating the pre-dominance of domestic concerns, said Dipen Shah, Head of Private Client Group Research, Kotak Securities.
Dragged down by a weak rupee and FII selling, the BSE benchmark Senses index closed with 153-point loss at 19,164.02, on Friday, registering losses for eight straight days. The Sensex had lost a massive 1,138.11 points, or 5.61 per cent, in eight days. This was also the second weekly drop for the key index.
“Stocks have seen a bad time recently, so is with bond market. On other hand, there is a huge demand for gold in the domestic market, indicating that prices could go up sharply,” said C P Krishnan, whole-time director, Geojit Comtrade.
If global gold rates go above USD 1340 per ounce, they could rally to USD 1,500 levels soon, impacting domestic gold prices, he added. Gold in New York rose by USD 4.60 to USD 1,313.50 an ounce.
Increasing MSF by 300 basis points in a single stroke triggered a massive sell-off in the bond markets, raising yields to its highest level since January 2009. The 10-year benchmark yield rose by over 50 basis points while its price dropped by 3.5 percent in a single day.
“Investors are left with no plausible avenues. They are not likely to invest in equities because it is considered risky. Investing in commodities is too complex for simple investors. Real estate may just be too overwhelming because of huge entry ticket size,” Vijay said.
Investors are possibly scared of bonds too considering the news of RBI contemplating rate hike. Indians may revert to what they know the best – buy gold, the only asset they understand, and to certain extend has delivered the desired result during uncertain time, he added.
D K Pant, Chief Economist of India Ratings, however, said: “There is no definitive indication that gold is gaining ground as an investment class as the price of gold has risen due to depreciation of rupee. Attractiveness of gold as investment option will depend on the global prices.”
He, however, added rupee depreciation would impact gold prices as the country is heavily dependent on imports to meet its gold demand.
It may be noted that concerned over widening current account deficit, which was primarily attributed to gold and oil imports, the government had increased customs duty on gold to 8 per cent, while the Reserve Bank had imposed a series of restrictions on import and financing of gold.
Increasing investor appetite for gold could also mean more trouble for government battling high current account deficit due to gold imports, analysts said. (PTI)
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