The predicted demand for gold in India is failing to appear, according to new reports. The Indian Rupee has struggled in recent months despite the weak US Dollar, forcing gold prices higher and as such reducing demand.

The rise in price is deterring investors and coupled with the bull run in the global stock markets, investors in India are opting for equities and mutual funds rather than putting their money into gold bullion or the Rupee.

With a lack of investors interested in bullion, the drive for gold is coming from jewellers, and in turn rural interest. Wedding season in India is in full flow, beginning in November and continuing through until May. The Times of India report that a bumper summer harvest in 2017 has left many in the agricultural industry with the capacity to spend.

Rural demand accounts for 60% of all India’s gold interest, so the rise in demand is good news. The downside of this is that this interest is not enough to bump global prices, and the real concern is what happens after the wedding season is over? The Rupee is weak, the US Dollar is weak, gold is expensive, and the Indian stock market is fragile.

The main way to improve gold demand in India, especially for investors, is to strengthen the Rupee. There are two ways this will happen. The first option is lazy: hope that the US Dollar weakens again. This would boost the Rupee and in turn make gold more affordable, but, given the imminent announcement of interest rate rises from the US Federal Reserve, the Dollar is likely to strengthen over the coming weeks and months.

The other option is to fix the trade deficit in India. Less imports and more exports would make the Rupee more attractive for investors, and this is a similar direction that the United States are embarking in. It’s an interesting coincidence that both nations have weakened currencies, and both are seeking to become more self-sufficient. Whether this is genuine correlation… only time will tell.

The Indian government revealed the 2018-19 budget at the start of February. Gold prices were low ahead of the budget while traders tried to tempt jewellers to buy, rather than postpone their orders until the announcement, but they quickly rose following the news that import duties were set to rise.

The rise contradicts a 4% cut predicted in the days leading up to the budget reveal, which many experts were hoping for in order to deter criminal activity – an issue India has been actively tackling since Prime Minister Modi came to power in 2014. Speaking to Reuters, Saurabh Gadgil, Vice President of the Indian Bullion Jewellers Association (IBJA) said: “Higher duty has opened up grey channels. The reduction is necessary to bring down the smuggling and unauthorised sales.”

Finance Minister Arun Jaitley (pictured above) revealed the changes in his fifth and final budget before next year’s general election. In his statement he revealed that import taxes would rise, and these are now expected to rise further. This is part of the country’s ‘Made in India’ project. Prime Minister Modi is aiming to protect Indian industry from the export threat of China, targeting a wide range of things from beauty aids, toys and furniture to electronic devices and component parts.

The rise – up to 20% in certain areas of imports – is a bold but risky move. Modi and his ministers must now find a middle ground, balancing India’s prosperity on a knife edge. Increased import tariffs and surcharges could promote Indian business, but they could scare off foreign investors; the same investors who are employing large swathes of the world’s largest workforce. India cannot afford greater unemployment because this will hurt economic productivity and homegrown production, it risks a decline in living standards if people can’t earn a living, and both of these things rock public confidence – something that would ruin the government’s chances of winning the election in 2019. The problem is that if India lets imports continue rising then the trade deficit will continue to grow and the Rupee will continue to suffer, meaning that wage growth and the true value of wages both decline.

Either way, the ability to afford gold is under real threat in India, which could take away one of the factors driving gold markets for 2018. The next few months will be telling.