Jewelers in Demand as Indians Seek to Dispose Banned Bills

(Bloomberg) -- Indian jeweler Bachhraj Bamalwa’s phone hasn’t stopped ringing since Prime Minister Narendra Modi announced on national television that high-denomination bills will be withdrawn from Wednesday as the government cracks down on corruption.

Five hundred rupee ($7.5) and 1,000 rupee notes will cease to be legal tender from Wednesday, Modi said in an unscheduled address to the nation. With bullion usually purchased in cash in India, the announcement led to a frenzy among people wanting to convert their cash hoard into gold. That spurred some wholesalers to boost prices by as much as 23 percent, said Kumar Jain, owner of U.T. Zaveri jewelry store in Mumbai.

Demand in the world’s second-largest bullion consumer will dry up soon as cash supply dwindles, said Bamalwa, who’s also a director with the All India Gems & Jewellery Trade Federation. Modi’s move will hit jewelry purchases, which were poised to fall even before Tuesday’s announcement. Elevated gold prices and India’s push for more transparency on purchases and income disclosure will cut the nation’s demand for bullion in 2016 to its lowest in seven years, before consumption recovers in 2017, the World Gold Council said on Tuesday.

The immediate effect may be a very short-term splurge of spending on gold jewelry and other high value articles as individuals seek to offload the soon-to-be obsolete notes, said Tom Kendall, head of precious metals strategy at ICBC Standard Bank Plc, in a report Tuesday. “This latest effort to crack down on the informal sector may be helpful in squeezing out undeclared gold flows.”

Cash Transactions

Some shops were open until midnight in Mumbai’s biggest bullion market, Zaveri Bazaar, seeking to tap demand, said Ketan Shroff, spokesman for the India Bullion & Jewellers Association Ltd. “After that jewelers might have to go on a holiday as no cash sales will happen.”

The government should have circulated the new notes before discontinuing the old ones as it will be tough for jewelers in the coming months until liquidity improves, said Shroff. India’s mainly unorganized jewelry market undertakes transactions mostly in cash as rural India, which makes up nearly 60 percent of the total demand has limited access to the banking system and rarely uses credit and debit cards for purchases.

“I have been getting calls from customers to open our store so that they can buy gold and pay by cash but we have refused and we will only accept legal tenders,” said Bamalwa.

Shares of jewelers plunged the most in over three years in Mumbai on Wednesday. Titan Co. Ltd. dropped as much as 15 percent, Gitanjali Gems Ltd. plunged as much as 20 percent, and Tribhovandas Bhimji Zaveri Ltd. slumped as much as 18 percent. Gold futures in Mumbai declined as much as 1.2 percent to 29,731 rupees Tuesday, the lowest in more than a week.

Panic and Chaos

The step by Modi, who is approaching the half-way mark of his term, is an attempt to fulfill his election promise of curbing tax evasion and recovering illegal income, locally known as black money. The move led to chaos across Indian cities as people lined up outside cash dispensing machines and fuel pumps.

"People are here because of the government’s decision -- there is definitely panic,” said Anil Prasad, a supervisor at the Batra fuel pump in New Delhi. In Thane, near Mumbai, a fuel pump stopped selling diesel to avoid further chaos, said Mukesh Manik, a pump attendant.

The notes in circulation will have to be deposited in banks by the end of December, Modi said in a late evening speech. This is the first time since 1978 the government has withdrawn money from circulation, according to the central bank’s website.

“Misuse of cash has led to artificial increase in property, land prices,” Modi said. “This step will strengthen the fight against corruption.”

The S&P BSE Sensex tumbled as much as 6.1 percent before trading 2.6 percent lower at 9:58 a.m. in Mumbai. The rupee dropped 0.2 percent to 66.75 per dollar, prices from local banks compiled by Bloomberg show. A gauge of real-estate shares sank as much as 14 percent amid India’s biggest crackdown against corruption in almost four decades.

--With assistance from Rajhkumar K Shaaw To contact the reporter on this story: Swansy Afonso in Mumbai at safonso2@bloomberg.net. To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net, Arijit Ghosh, Keith Gosman