Rising gold prices and a subdued consumer environment are likely to weaken demand for the yellow metal in one of the world's top markets for gold in FY2020, ratings agency ICRA said in its outlook for the Indian gold jewellery retail sector on Wednesday. ICRA expects gold jewellery demand to be subdued in FY2020 with expected volume de-growth of 6-8% on the back of elevated gold prices and weak consumer demand.

In the first half of FY2020, the demand for the yellow metal de-grew by 9.5% amidst a 20% rise in gold prices during this period. “While domestic demand was strong in April and May 2020 amidst higher number of auspicious days and temporary fall in prices, there has been a steady decline in jewellery buying since June as gold prices rose sharply," the note said. Gold prices are currently at a multi-year high amid volatile trade relations between USA and China, a weakening dollar, and other factors that have led to a surge in the price of the yellow metal, the note said.

In August this year, price of gold breached the Rs40,000 (per 10 gram) mark as investors rushed to buy the precious metal amid uncertain global cues. This apart “faltering rural demand, economic slowdown and liquidity crunch affected jewellery demand," the note said. In FY18, the jewellery sector registered an 8.9% growth; while gold jewellery demand was flat in FY2019 affected by rising gold prices, lesser number of auspicious days and tightened credit to the gems and jewellery sector, the note said. India is a large consumer of gold metal where investing and buying gold jewellery is customary among many households.

Typically retailers pin demand on the festive season which also coincides with the wedding season that see middle-income households rush to buy everything from bangles to small jewellery sets. However, high prices have kept consumers cautious this year as festivities failed to lift sales. The critical festive season of the third quarter remained tepid, ICRA said, pinning some recovery in Q4 "given the wedding season ahead." India’s value-conscious shoppers make the country a price- sensitive market for gold, as a result “inflation in gold prices affect consumer sentiments and results in postponement of purchases by customers."

In 2020, higher gold prices are expected to see retailers register better realisations in revenues even as volumes remain tepid. "For FY2020, the revenues are expected to be supported by better realisations even as volume growth will be negative. Due to cautious lending environment, the industry debt levels have not increased in last two years although there has been some impact on liquidity profile of retailers. With the inventory rationalisation efforts expected to continue, the industry debt indicators are likely to remain stable," the note said.

However, over the medium to long term, ICRA maintained that demand for the yellow metal in Asia's third-largest economy "will continue to benefit from the cultural underpinnings, evolving lifestyle, growing disposable income, favo​urable demographic dividend and the growing penetration of the organised sector."