₹2000 banknotes withdrawal: Will scrapping of India's highest currency impact gold prices?
3 min read 27 May 2023, 09:15 PM ISTA week has passed since RBI scrapped ₹2000 banknotes but did not ban it completely. The withdrawal of the country's highest currency has already started to show its effect especially in gold demand.
PremiumExchange of ₹2000 notes at banks have begun this week, in line with RBI's directions for withdrawing the highest denomination currency of India. RBI has guided customers to take two possible actions, either exchange their ₹2000 notes or deposits for which the central bank has given over four-months timeframe. However, the withdrawal has also led to a massive rush at jewellery shops for buying gold against ₹2000 notes. And this has already made physical gold expensive for buyers!
Eshwar Surana, Managing Director, of Raj Diamonds said, "Cash transactions have sharply risen and we are definitely witnessing some rush situations in the market. The phasing out of 2000-rupee notes has created a sense of urgency among the people to safeguard their monetary value by investing in jewellery."
As per a Reuters report, physical gold flipped to premiums in India this week for the first time in nearly three months, as retreating domestic prices along with the central bank's move to withdraw the country's highest value currency notes boosted buying.
That being said, Indian dealers selling gold at a premium of up to $3 an ounce over official domestic prices — which is inclusive of the 15% import and 3% sales levies. This is the opposite of the discount of 5% offered last week.
Overall, this week, local gold prices dipped to ₹59,363 per 10 grams which is the lowest since April 3.
Indians have till September 30, 2023, to exchange ₹2000 notes. The process began on May 23rd.
Will the withdrawal of ₹2000 banknotes impact gold prices?
According to Surana, people will aim to sidestep the need to exchange or deposit ₹2,000 notes at banks and will come forward to spend on luxury items such as diamond jewellery. Hence, Surana believes that there will be a short-term increase in demand as people try to offload their ₹2,000 notes and we expect a 20-30 percent increase in sales in the near future.
In regards to gold prices, Chintan Mehta CEO of Abans Group said, "Gold prices at the moment are a function of geopolitical risk, De Dollarisation, Debt ceiling in USA & how interest rate in USA moves."
Mehta added that ₹2000 banknote exchange with gold can push premium in India over its international price by 3 to 5 % but it can’t be a factor determining the price direction of gold.
Along similar lines, Manish Chowdhury -Head of Research Stoxbox said, " Following the RBI’s announcement to withdraw ₹2,000 notes from circulation last week, there has been no meaningful movement in gold prices on commodity exchanges. However, instances have been reported of customers paying premium prices for gold in exchange for ₹2,000 notes which we feel is mostly a knee-jerk reaction to the announcement."
Hence, Stoxbox expert does not believe that there would be much rush this time around to buy gold as seen during the demonetization period because it is not a note ban this time, the magnitude of note withdrawal is relatively low, stricter KYC norms are in place and sufficient time has been given by the RBI to remove ₹2,000 notes from the system.
Further, Chowdhury continues to see this announcement as a non-event in the context of the larger gold price picture as gold prices are generally an interplay of varied economic events, global demand-supply scenarios, currency movements, and geopolitical environment.
Lastly, Mehta said, "We are Bullish on gold and silver in the medium to long term. One can buy gold with stop loss of 1908 level in international spot."
On Friday, spot gold prices picked up 0.33% to $1,946.69 an ounce, while gold futures edged up 0.03% to end at $1,944.30 per ounce.