Mumbai - Unprecedented outflows from Indian gold funds are expected to reverse as money managers predict the rupee will slump to an all-time low and resurgent inflation will spur demand for bullion as a store of value.
Kotak Mahindra Asset Management and Reliance Capital Asset Management expect investors to boost holdings after withdrawing a record 3.1 billion rupees (R493 million) in June and July. Bullion prices in the biggest gold-consuming nation have surged 24 percent since the end of June, while indices measuring Indian bonds have fallen 6.1 percent and stocks have dipped 4.3 percent.
“Gold is a natural hedge on your portfolio,” Kotak Mahindra Asset fund manager Lakshmi Iyer said last week. “It’s the last man standing.”
Bullion in India has rallied at almost twice the pace of global prices this quarter as the rupee has plunged, threatening to fuel inflation. Optimism is rising in India at a time when gold traders elsewhere are more bearish on the metal as they prepare for the US Federal Reserve to end stimulus.
“Gold helps portfolio diversification, especially in an environment of rupee depreciation,” Reliance Capital Asset fund manager Hiren Chandaria said on August 16.
“We are likely to see a good rebound in demand before Diwali,” he added, referring to the Hindu festival that falls in November this year.
Iyer said Indian investors would be attracted to gold as long as inflation stayed above 7 percent.
Consumer prices rose 9.64 percent last month, official data show, while top lender State Bank of India pays 6.5 percent interest on three-month deposits.
Withdrawals from exchange-traded funds in gold were 1.07 billion rupees in July, 48 percent lower than the outflow in June, according to data from the Association of Mutual Funds in India.
Stronger gold demand amid the rout in local debt and equity markets undermines Finance Minister Palaniappan Chidambaram’s efforts to channel savings locked in bullion into financial instruments. Policymakers have raised import tariffs three times this year to curtail shipments that account for about 80 percent of India’s current account deficit.
The deficit widened to a record 4.8 percent of gross domestic product in the year to March. The Reserve Bank of India sees the shortfall as the biggest risk to the economy.
The rupee has lost 7.6 percent of its value against the dollar this quarter.
Import duties on gold were increased to 10 percent on August 13 from 8 percent. India plans to limit gold imports to 850 tons in the year to next March to cut the deficit.
Smuggling has risen as the tariff increases fail to suppress demand for the metal.
The Indian government’s measures to damp gold demand are comparable to trying to hold sand in one’s fist, according to Rapaport Group chairman Martin Rapaport.
“The more the government squeezes Indians to force them into rupees, the more the currency will depreciate and they will go into other things,” he said this month. “Indians want to maintain a store of value, so they go to gold.” – Bloomberg