Gold jewellery demand is expected to contract by 35 per cent in volume terms this fiscal, hit by the coronavirus pandemic and high prices, according to a report.
The demand is likely to see a rebound in the second half of this financial year after a poor performance in the first two quarters, ratings agency Icra said.
"Changed consumer social distancing habits and limitations on social events will slacken the pace of recovery. We maintain a negative outlook on the gold jewellery retail industry, considering the over 35 per cent volume contraction likely in FY21," Icra Vice President K Srikumar said.
Gold jewellery demand fell sharply by 41 per cent during the fourth quarter of FY20, affected by the lockdown in the critical last two weeks of March.
This was further widened by the country-wide shutdown of retail stores during the first few months of the current fiscal, Srikumar observed.
The supply chain disruption and restrictions over movement of non-essential goods in April and May resulted in jewellery demand falling sharply by 74 per cent during the first quarter of FY21. Sales linked to Akshaya Tritiya was lost and the sharp rise in gold prices further dented the consumer sentiments, he added.
Demand also remained weak in the second quarter, declining 48 per cent year-on-year with sustained rise in gold prices and extended lockdown in key metro cities like Chennai and Mumbai, he said.
"Retailers are now banking on the typically strong festive period and wedding season demand to ease the H1 FY21 pain. Accordingly, they expect the demand sentiments to rebound in Q3 and Q4 of this financial year.
"Expectations of a further rise in gold prices, shifting preferences towards gold as an asset class, better rural demand, are other factors supporting a demand revival," Srikumar added.
According to the Icra report, despite continuing pandemic-related uncertainties, almost all retail showrooms have opened and footfalls have improved in the last 2-3 months following easing of lockdown.
There is a shift in consumer behaviour affecting shopping habits as well as in consumer spending between product categories. Online sales still remain low at less than 5 per cent.
The revenue share of studded jewellery declined compared to last year, given the rising preference for gold jewellery amid the rapid increase in gold prices, while the share of exchange of old gold by customers increased in the current year, the report pointed out.
"The lending to the gems and jewellery sector, continues to remain cautious. However, the sector's long-term outlook remains favourable supported by cultural underpinnings, an evolving lifestyle, growing disposable income, favourable demographic dividend; and the growing penetration of organised sector," Srikumar added.