India's gold market is bracing for its peak festive season, with a complex interplay of factors influencing demand for gold jewellery. While record-high gold prices are giving jewelers reason to be cautious, potential GST cuts and a historically strong cultural affinity for gold could boost sales.

Gold prices have surged to unprecedented levels, reaching Rs 1,10,540 per 10 grams in the physical market, with consumers paying Rs 1,13,856 after accounting for the 3% GST. This 42% year-on-year increase compared to last year, when prices hovered around Rs 80,000 with GST, has made gold a preferred investment worldwide. Globally, gold has surged to an all-time high, touching $3,670 per troy ounce.

Despite the high prices, jewelers anticipate that a significant portion of sales will come from customers exchanging old gold for new designer jewelry. PNG Jewellers expects old gold exchange to surge to 45% this festive season, compared to 20-25% last year. While gold volume may shrink by up to 15% due to the price rise, value-wise, it is expected to increase by 25-30%. The India Bullion & Jewellers Association (IBJA) notes that buyers have accepted that prices are unlikely to drop below Rs 1 lakh anytime soon, and investment demand for gold is rising.

The government's recent reduction of GST on various consumer goods, including soaps and small cars, is expected to stimulate domestic demand and increase retail gold purchases, as it provides consumers with greater disposable income.

The World Gold Council India indicates improved consumer sentiment in recent weeks, suggesting that while purchase volumes may decline, the overall value of demand is set to rise. They also note a growing investment demand for gold, particularly through ETFs.

However, some experts anticipate a dip in gold demand this festive season due to the record-high prices, which may dampen jewellery purchases. Amit Modak, chief executive of PN Gadgil and Sons, expects demand to fall by about 10%-15% in volume, as consumers have fixed budgets that are not keeping pace with rising prices. Lower gold demand in India could limit rising global prices. However, reduced imports could also help reduce India's trade deficit and strengthen the rupee.

The upcoming festive season, encompassing Dussehra and Diwali, along with the winter wedding months, typically accounts for approximately one-third of India's annual gold sales. Last year, festive demand reached 265.8 metric tons, boosted by a price correction and a reduction in import duty from 15% to 6%.

Even with GST 2.0's structure of 5% and 18% slabs, plus a 40% band for sin luxury goods, gold remains at 3% GST on metal value and 5% on jewellery making charges. This is to balance cultural importance, demand sensitivity, and enforcement concerns, preserving stability for households and the trade during peak seasonal buying windows.