Why have Indian gold ETF inflows slipped to six month lows?

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While investors flocked to equity funds in May investing over Rs 10,082 crore, gold exchange-traded funds (ETFs) have slipped to six-month lows.

This is also in sharp contrast to the global gold ETFs which saw inflows of $3.4 billion in May, reversing three straight months of net outflows.

Net inflows in Indian gold exchange-traded funds (ETFs) dropped to a six-month low of Rs 287.86 crore in May compared to Rs 680 crore in April, down 60%, as per the data released by the Association of Mutual Funds of India (AMFI).

The World Gold Council (WGC) in its latest report had stated that the global gold ETFs have seen inflows due to investment demand increasing with the price strength of gold, along with renewed inflation concerns in the market, a weaker dollar, and lower real yields.

So, why has demand for Gold ETFs slipped in India?

Some experts point at the way gold has rebounded from lows, rising 7% in May, which hit demand. The bigger reason, however, has been the impact on consumer sentiment due to the second wave of the Covid-19. The second wave was much hard-hitting in India compared to other countries in May. The spare money which otherwise was going into investments in gold, stock markets, fixed income options had to be saved for healthcare expenses.

Many people began pledging their household gold savings to borrow money to meet their essential expenditure as well as emergency medical requirements, as per recent official data from the Reserve Bank of India.

Vandana Bharti, Assistant Vice President (AVP), Commodity Research at SMC Global said, “We have seen strong inflows in International ETFs whereas activities in India ETFs were low. The main reason behind these low activities was the rapid increase in Covid cases which brought uncertainty once again and people began to sit on cash. Sharp appreciation in rupee and recovery in dollar index also limited the activities whereas the surging equity market and active participation of DII’s overshadowed the gold rally. Another important reason was that we were going through the wedding season in April and May and people preferred to buy physical gold rather than ETFs during this time. Higher import of physical gold in India indicated the same trend.”

Is this only an aberration?

In the just-concluded financial year, FY21, gold exchange-traded funds (ETFs) had recorded net inflows worth Rs 6,918 crore, the highest ever in a year which was a massive jump of 328% year-on-year from Rs 1,613 crore in FY20. This trend suggests investors are bullish on ETFs as an option for gold investment.

Experts feel that the second wave of Covid infections could derail economic recovery and thus support gold prices going forward and suggest investors should use the price corrections as an opportunity to accumulate gold.

Anuj Gupta, Vice President (VP), Commodity and Currency Research at IIFL Securities says, this slowdown is only for the short term. While gold prices may feel resistance in the near term due to a firmer dollar, the prices will get support with the rising risk of inflation surging.