Indian jewellers are facing higher gold leasing costs in the near term, as a tariff scare from the Trump administration has prompted global banks to rush to secure the precious metal for the United States, leading to a potential supply crunch, according to industry exectives. Analysts warn that rising interest rates are expected further pressure jewellers' margins, even as their sales decline amid record-high gold prices. The price of 10 grams of gold hit an all-time high of Rs 86,360 on the Multi Commodity Exchange (MCX) last week amid tariff uncertainties.

The supply weakness has pushed gold leasing rates in India to a record high, doubling within a month, mirroring the overseas market, where rates surged due to tightening supply. Gold stockpiles in New York, where the CME Group's COMEX gold is stored, have almost doubled from November levels as traders hoard the asset ahead of possible trade disruptions. From 17.5 million troy ounces in November, COMEX gold inventories surged to 33.38 million troy ounces in early February.

Gold leasing rates refer to the interest rates charged on leased gold when jewellers or manufacturers borrow gold, often from banks or bullion traders, instead of purchasing it outright. Banks in import-dependent India source gold from overseas banks and extend it as loans to jewellers. Vaults in key Indian cities storing gold imported by bullion banks are nearly empty, as banks have moved gold to the United States and are not interested in bringing it to India given the discounts, Reuters reported earlier this month citing a Mumbai-based dealer with a bank.

This comes as some players report dismal earnings in the October-December quarter. Top player Titan saw EBIT for its jewellery division going down 2.4 per cent YOY to Rs 1,398 crore in the third quarter after it booked inventory losses. Rival Senco Gold too reported weak margins, with profit after tax (PAT) plumetting 69 per cent amid higher costs for setting up new subsidiaries, volatility in gold prices and a spike in custom duties.

Titan Company Ltd has already flagged anticipation of increased lease rates in the coming quarters. "One of the things that we are seeing is in the last 1-month phenomena is a slight increase in the gold on lease rates indicated by the banks. But again, there is also a supply situation that they are also trying to address. So, we need to see, therefore, over the next few months how the supply situation of gold plays out and, in that context, how these rates finally stabilise," said Vijay Govindarajan, Associate Vice President - Finance, Titan.

"The banks are increasing their interest rate, which was previously around 2.5 to 3 percent, by another 3 to 3.5 percent, going forward in February and March, we expect gold leasing rates to rise to about 6 to 7 percent, depending on the bank," said Suvankar Sen, Managing Director of Senco Gold, in a post-earnings call on February 14.

He added that this increase would potentially raise funding costs by approximately 0.5 percent, impacting the company's overall numbers by Rs 7-8 crore over the two-month period.

"We need to either have actions in terms of making charges or higher charge ratio to compensate for the same", Sen added.

Titan's Govindrajan had a similar view on the situation. "The initial indications are that the gold lease rates could go up. It's just that we need to wait for a month or two to understand how the supply, and therefore the pricing, will play out," Govindrajan told analysts earlier this month.

Meanwhile, Kerala-based Kalyan Jewellers, one of the largest jewelry retail chains in India, flagged that the leasing rates are stable for the company.

"No, interest rates cannot be passed into the customer, as of now, we cannot speculate on that, because nothing has come out," said Executive Director Ramesh Kalyanaraman in a post earnings call with analysts on January 30.

Courtesy: Money Control