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The decline in gold prices may have a significant impact on rural spending on account of the negative impact on people’s wealth in these areas.
This in turn would be negative for consumer staples, according to an India Equity Strategy report from Deutsche Bank dated 15 April 2013.
“The sharp downward trend in international gold prices, coinciding with recent tapering of rural wage growth and sticky rural inflation, may act as a near term dampener for rural consumption, which has been the mainstay for Indian GDP growth and a key safe haven for investors,” said the report authored by research analysts Abhay Laijawala and Abhishek Saraf.
The report noted that while the longer term 'Rurban' India story remains intact, a continuing decline in gold prices will dent the wealth effect in the Indian hinterland, which had coincided with the strong income effect, which had in turn buoyed rural consumption over the past five years.
“The positive spread between rural wage growth and rural CPI inflation has progressively narrowed, impacting the purchasing power of India’s hinterland. We believe that a continuation of these trends bodes negatively for consumer staples, which have emerged as a safe haven for investors, scouting for certainty of earnings growth. We reiterate our underweight stance on consumer staples in the model portfolio,” said the duo.
The report however noted that the fall in gold and crude would help the Reserve Bank of India manage issues such as slowing growth and high inflation.
