Why demand for silver is soaring in India

India's love for gold is well known. But now another metal has started to shine bright.

Jeweller Kumar Jain says he is noticing a rise in demand for silver at his store, located in a bustling market area in Mumbai.

“Gold prices have gone so high, so people have diverted to silver, because of their budget,” says Mr Jain, adding that buyers are anticipating the value of silver will rise.

Customers mainly buy bars and coins, but jewellery is also growing in popularity, says Mr Jain.

Demand for silver is on the rise across the country, analysts say.

Silver imports into India surged to 5,100 tonnes in the first seven months of this year, according to data from India's Ministry of Commerce and Industry. The country's silver imports for the whole of last year stood at 2,773 tonnes, at 2,218 tonnes in 2020, and 5,969 tonnes in 2019.

“Silver is considered as a safe haven asset, along with gold, and with the recent fall in prices, market participants have grabbed the opportunity to accumulate the metal,” says Navneet Damani, senior vice president of commodity and currency research at Motilal Oswal Financial Services.

“As we are out of lockdown and the pandemic, investing in the white metal amid India's festive and wedding seasons becomes even more attractive,” he adds, with people typically looking to make big purchases during the festive season, which is under way in the country.

Silver futures in India were trading at 55,485 Indian rupees ($697) a kilogram at the close of the market on Friday. That compares to an all-time high of 77,949 rupees in 2020.

Local factors, including the rupee, influence silver's price locally, but it is also driven by the global rate.

“After showing signs of recovery, spot silver once again fell below $20 per ounce and is down month to date as the outlook of further rate hikes [in the United States] drove investors into the greenback [US dollar] instead of non-interest bearing assets,” says Naveen Mathur, director, commodities and currencies, Anand Rathi Shares and Stock Brokers.

The price of the metal is determined by several factors.

“Silver primarily is a mix of two things: industrial and precious metal, hence the number of factors influencing price volatility also maximises,” says Mr Damani.

Silver is used in manufacturing goods in heavy industries and in technology, including smartphones.

“In the coming years, silver may benefit from rising new-age technology demands from electric vehicles, smartphones, solar panels,” says Radhika Gupta, managing director and chief executive at Edelweiss Asset Management, which is launching a combined gold and silver fund this month to tap investor demand.

“Gold and silver both have some commonalities in terms of hedge against inflation and low correlation with equities and fit well in one's portfolio for diversification needs.”

India's market regulator, the Securities and Exchange Board of India, in November 2021 permitted the launch of silver exchange traded funds, in order to enhance participation in the bullion market.

This has prompted several financial institutions in India to set up silver exchange traded funds.

Several analysts are forecasting an upward trend for silver prices.

“We believe that the larger trend is still bullish and the current dip provides an opportunity for medium term investors to enter for an upside target towards 65,000 rupees [per kg] and above,” says Mr Damani. “Our long term bias for a 12- to 15-month perspective is strongly positive towards 80,000 [rupees] and above.”

As well as pure investment demand, silver jewellery is also gaining a lot of traction in India, particularly among the younger generations who are looking for cheaper alternatives to gold, which is helping to drive imports.

“People in India are extremely bullish on silver,” says Amit Jain, the co-founder of Ashika Global Family Office Service. “Silver was earlier used as an industrial commodity largely. But now with the millennials and new generation, they are using silver jewellery much more than the older generation. The new generation don't want to buy such costly gold and block their capital.”

Public relations professional Tameena Ali says she bought silver necklaces and earrings recently for 16,000 rupees.

“Silver jewellery isn't very commonly worn like gold and diamond and it looks very classy and dignified,” she says. “And I prefer silver jewellery as silver comes cheap.”

She adds that in the future she “would choose to sell it at a higher price and hopefully make some profit out of it”.

Gold has also become even less affordable as prices have been driven higher in India by a customs duty raise imposed last month by the government, which elevated the levy to 12.5 per cent from 7.5 per cent. This move is an effort to curb imports of the precious metal that weigh heavily on the country's current account deficit, and in turn fuels the deprecation of the rupee.

However, Mr Jain is quick to point out that silver’s popularity is still nowhere near that of gold for Indians. The yellow metal has long had enormous cultural and religious significance and is a way of storing wealth, too. India is one of the world's largest consumers of the precious metal.

“Silver has less value than gold – gold is almost 10 times the price,” says Mr Jain, who is also a spokesman for the India Bullion and Jewellers Association.

The depreciation of the rupee in India, which has hit record lows in recent weeks, adds to the cost of gold and silver.

A few shops down the road from him, jeweller Anil Jain says he has seen a 35 per cent increase in silver sales compared with last year.

“Coins are popular because in India people believe in gifting through silver coins on any occasion or festival,” he says.

Bars of silver are also proving popular because “the rates are good and the valuation in bars is good on resale”.

Jeweller Dishi Somani, the founder and managing director of DishiS Designer Jewellery, based in Delhi, says that she is noticing a “shift” towards silver.

“Silver is one of the most sturdy metals available in the market,” says Ms Somani. “Another reason it’s a growing preference is its long-lasting durability and lightweight coming with quirky designs.”

With the price of silver being far lower than gold, it is not as profitable for jewellers, however.

There are mixed views on the outlook for silver prices, which will largely be driven by global factors.

As the US Federal Reserve continues with its interest rate increases, this could divert investor interest away from gold and silver towards the US dollar.

“Our base case remains, assuming that the US Federal Reserve will fight inflation successfully without pushing the US economy into recession, that safe-haven demand will fade further and that [silver and gold] prices will move gradually lower on a medium to longer-term horizon,” Carsten Menke, head of next generation research at Julius Baer, said in a research note.“The bull case remains a recession as this should lure safe-haven seekers back into the market.”

Ashika's Mr Jain says he believes “silver can outperform gold in the next two to three years per annum if we take it from an investment point of view”.

On the other hand, Mr Mathur says “although the prevailing low prices of silver may bring in some investment demand in the commodity, but still from the performance perspective, gold will continue to outshine silver in the long term”.

Overall, there is a lot of volatility and opportunity in the market, analysts say.

“Historical recession trends has proved in favour of the white metal and, if we do not enter a recession, or growth prospects start to get better, we could see demand for industrial metal getting strong favouring the metal prices,” Mr Damani says.

Locally, although silver prices have “been quite choppy for sometime”, he remains optimistic the metal will shine.