The Impact of Gold Price Fluctuations on the Indian Economy -

The Impact of Gold Price Fluctuations on the Indian Economy

written by
Jnana Prasad

November 22, 2023

5min read

#Gold rate fluctuation
#Indian economy

Indians have an insatiable fondness for gold, seeking it out for a multitude of purposes – from investments to gifts, offerings to deities, weddings, and various celebratory occasions. Yet, there’s a constant hurdle that impedes the purchase of this coveted metal: the fluctuating gold prices.

This increase and decrease in the gold rate influence buying and selling patterns, a factor that raises a curious question: How do these fluctuations impact the Indian economy? Let’s delve into this interesting intersection of gold and economic dynamics and explore how the gold rate affects the Indian economy:

  • Impact on Current Account Deficit (CAD)

India is one of the largest consumers of gold globally, and the import of gold has a substantial impact on the country’s current account deficit (CAD). When gold rates are high, the import bill rises, widening the CAD. 

This dependence on gold imports can put the economy at risk. Such changes can lead to a much higher increase in the global gold rate and disruptions in the supply chain. 

  • Inflation and Investment Patterns

Gold rate fluctuation can also influence inflation and investment patterns. When central banks engage in quantitative easing (QE), it can lead to a decrease in the value of the currency and an increase in inflation expectations. 

This can cause investors to seek safe-haven assets like gold, leading to higher demand and prices. Consequently, the fluctuation in gold rates can impact inflation and investment decisions in the Indian economy.

  • Impact of Global Factors

The movement of gold prices in international markets also impacts the price of gold in India. Global government policies and geopolitical events can influence the demand for gold in India, leading to price fluctuations. 

For example, Changes in US Federal Reserve interest rates can result in money flowing into government securities and the banking system from gold reserves, affecting gold prices in India, and the disruption political warfares bring to the global economy can result in currency depreciation and increase in gold investment leading to a direct surge in gold prices affecting the Indian market. 

  • Foreign Exchange Reserves

India’s foreign exchange reserves are impacted by gold prices. When gold prices surge globally, it can influence the value of India’s gold reserves, affecting the overall foreign exchange position.

  • Consumer Spending

Gold is deeply ingrained in Indian culture and is a preferred choice for savings and adornment. Fluctuations in gold prices influence consumer behavior. During times of increased prices, consumers might postpone or reduce their purchases of gold jewellery, impacting the retail sector and overall consumer spending.

  • Monetary Policy

The Reserve Bank of India (RBI) closely monitors gold prices, as they have implications for inflation and the economy. If gold prices surge significantly, the RBI might consider tightening monetary policy to curb inflationary pressures arising from higher import costs of gold, potentially raising interest rates to manage inflation.

  • Jewellery Industry

The gold rate directly affects the Indian jewellery industry. High gold prices increase the cost of raw materials for jewellers, affecting their margins and profitability; to adjust this, the jewellers will increase the cost of their end product itself or may try to adjust by incorporating other bonding metals into the jewellery piece and also choose simple, lighter designs and market them in the name of ‘every day wear’ to stabilize their sales and escape loss. 

  • Collateral Value

Gold is commonly used as collateral for loans in India. When gold prices rise, the value of collateralized gold increases, potentially enabling borrowers to access larger loan amounts or better terms. Contrarily, a drop in gold prices might decrease the collateral value, impacting borrowers’ ability to secure good loans or leading to low loan-to-value ratio adjustment by lenders. 

For example, Higher gold prices might enable farmers to secure loans for investing in farm infrastructure; similarly, a decrease in gold prices might limit their ability to access credit, potentially affecting individual income and agricultural productivity. 

In conclusion, the fluctuation in gold rates has multifaceted effects on the Indian economy, influencing the CAD, inflation, investment patterns, and purchasing power. Given the cultural and economic significance of gold in India, monitoring and understanding the factors that drive gold rate fluctuation is crucial for policymakers, investors, and individuals alike.

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