Domestic gold prices have surged by 10% year-to-date, driven by a global rally in gold prices. International gold prices have jumped 18% this year, supported by robust central bank purchases, heightened geopolitical tensions, and growing expectations of a policy shift from the US Federal Reserve, according to the World Gold Council.

The recent cut in import duty has sparked a revival in gold demand across India. The India International Jewellery Show, which recently concluded, reported a significant increase in orders from retailers. This surge is particularly noticeable in preparation for the upcoming festive and wedding seasons.

Jewellery manufacturers have observed some of the highest order volumes in years, reflecting strong buying interest from both retailers and consumers.

The trend of buying gold bars and coins remains strong, with both consumers and jewellers taking advantage of favorable prices to stock up for future use.

Historical data suggests that Indian consumer demand for gold—encompassing jewellery, bars, and coins—could rise by an additional 50 tonnes or more in the second half of 2024. This anticipated increase is driven by an initial boost in consumer interest due to attractive prices and a longer-term alignment of local prices with international rates.

In a significant change, domestic gold prices, which had been trading at a discount to international prices for five months, have started to trade at a premium following the Union Budget announcement.

The discount had widened considerably in July, reaching about USD 80 per ounce, due to reduced demand and increased gold supply through various trade agreements and unofficial channels.

However, wholesalers with inventory purchased under the old customs regime began selling gold at a premium to their costs to offset losses, supported by rising consumer demand.

Recently, premiums have moderated from USD 28 per ounce to around USD 5 per ounce, indicating a shift in market sentiment and reflecting the influence of rising global gold prices and potential adjustments in inventory valuation.

The Union Budget introduced changes that make gold ETFs a more appealing investment. The reduction in the long-term investment holding period and a lower tax rate have contributed to this shift.

According to data from the Association of Mutual Funds in India (AMFI), net inflows into gold ETFs in July reached Rs 13.4 billion (approximately USD 160 million), marking the highest monthly inflow since February 2020 and an 84% increase compared to June 2024.

Despite these inflows, the total assets under management (AUM) for Indian gold ETFs grew only slightly by 0.3% from the previous month, reaching Rs 345 billion (USD 4.1 billion). This modest growth is attributed to an 8% drop in domestic gold prices following the import duty reduction. Year-to-date, net inflows into Indian gold ETFs total Rs 45 billion (USD 543 million), with AUMs up by 48% compared to a year ago.

The Reserve Bank of India (RBI) has continued its gold purchasing trend, albeit at a slower pace following a significant increase in June, when purchases hit 9.3 tonnes—the highest monthly total in nearly two years.

Year-to-date, the RBI's gold acquisitions have totaled 44.3 tonnes, surpassing the total purchases of the past two years combined. The RBI’s gold reserves have reached a record 849 tonnes, representing 8.8% of total foreign reserves, compared to 7.5% a year ago.

In July, gold imports remained steady at USD 3.1 billion, maintaining the stable trend observed over the previous three months. Between April and July, imports averaged USD 3.2 billion, with volumes ranging between 43 and 47 tonnes. The gold import bill for July 2024 was 11% lower than the previous year, with an estimated 26% decrease in volume, around 47 tonnes.

Despite the rise in international gold prices, domestic gold prices in India have notably decreased, primarily due to a 9% reduction in import duty announced in the Union Budget 2024-25. This policy change has led to a 6% drop in the landed cost of gold, shifting the dynamics of the domestic gold market.