The Indian gold market has seen significant growth over the past two decades. In 2000, the price of gold in India was around INR 4,000 per 10 grams, and by the end of 2020, it had risen to around INR 50,000 per 10 grams.
|Gold Price in Indian rupee (symbol: ₹; code: INR) per Ounce From: bullion-rates.com|
|Gold Price in Indian rupee (symbol: ₹; code: INR) per Gram From: bullion-rates.com|
The period from 2000 to 2010 saw steady growth in gold prices, with the global financial crisis of 2008-09 causing a surge in demand for gold as a safe haven asset. The Indian government’s efforts to liberalize the gold market by allowing imports and establishing commodity exchanges also contributed to the growth.
From 2010 to 2013, gold prices continued to rise, but the Indian government’s efforts to curb gold imports by imposing restrictions on gold imports and raising import duties led to a decline in demand for gold. However, the easing of these restrictions in 2014 led to a rebound in demand for gold.
In 2015, the Indian government launched the Gold Monetisation Scheme to mobilize idle gold held by households and institutions and put it to productive use. The scheme initially received a lukewarm response but has gained traction in recent years.
The period from 2016 to 2020 saw a steady increase in gold prices, with factors such as geopolitical tensions, trade wars, and the COVID-19 pandemic contributing to the rise. The Indian government’s efforts to reduce the trade deficit by curbing gold imports and promoting domestic gold production and refining also impacted the market.
The factors that can affect the price of gold in India are:
- Global demand and supply: The demand for gold is global and any changes in demand or supply can impact the price of gold in India. For example, if the global demand for gold increases due to economic or geopolitical uncertainty, the price of gold in India may increase. In 2021, the demand for gold in India increased significantly, with a total demand of 797.3 metric tons, representing a growth of 78.6 percent compared to the previous year, and the first growth after four years of continuous annual decline. The increase in demand did not affect the growth in the value of gold, however. India primarily meets its gold demand through imports, and in the financial year 2022, the value of India’s gold imports was estimated at over 3.4 trillion Indian rupees. The import of gold has been a major cause for the country’s trade deficit, and to curb this, the Modi government changed India’s gold import policy by introducing a higher import duty and allowing import only via nominated agencies. The country produces a minimal amount of its gold needs through local mining, and a small amount is also generated through recycling. Gold purchases are an important source of investment in India, and weddings and festivals across the country lead to major gold sales. Around 20 percent of annual sales come from the Hindu festival of lights, Deepavali. The precious metal is considered auspicious and is worn on important occasions and ceremonies mainly in the form of jewelry. The country consumes more than 500 metric tons of gold jewelry every year since 2010.
- International gold prices: The international price of gold is an important factor in determining the price of gold in India. The price of gold is determined by its demand and supply in the global market, and any fluctuations in the international market can impact the price of gold in India.
- Currency exchange rates: The price of gold is also impacted by the exchange rate of the Indian Rupee with other major currencies. The fall of the Indian rupee will increase the value of gold prices. The inverse relationship between gold and USD means that when the value of the USD decreases, the demand for gold rises, resulting in an appreciation in gold prices. Similarly, the relationship between gold and INR is also quite similar, with a depreciation in the rupee leading to a simultaneous increase in gold prices, and vice versa. Furthermore, the relationship between USD and INR is such that when the USD appreciates, the rupee takes a hit, and vice versa. It is important to study both the gold and currency markets simultaneously to establish a correlation if one plans to trade with both these assets. With this information, a currency and commodity trader can make informed trading decisions based on the performance of gold, USD, and INR. For instance, if the USD is expected to weaken, one could consider investing in gold to take advantage of the expected rise in gold prices. Similarly, if the INR is expected to depreciate, one could invest in gold to hedge against currency risks. Overall, understanding the relationship between these assets is crucial for making informed investment decisions in both the commodity and currency markets.
- Inflation: Inflation is a major factor that can impact the price of gold in India. When inflation rises, the value of the Rupee decreases, and the price of gold usually increases. In recent years, India has experienced both high and moderate levels of inflation. In 2021, the average inflation rate in India was around 6 percent, which is higher than the Reserve Bank of India’s target inflation rate of 4 percent (+/-2 percent). This inflation rate has been primarily driven by a rise in food and fuel prices. To control inflation, the Reserve Bank of India (RBI) uses various monetary policy tools such as increasing or decreasing the repo rate, which is the rate at which commercial banks can borrow money from the RBI. When the repo rate is increased, the cost of borrowing increases, leading to lower demand for loans, which in turn lowers consumer spending, leading to a decrease in inflation.
- Interest rates: Interest rates also play a significant role in determining the price of gold. When interest rates are low, the opportunity cost of holding gold decreases, which can increase demand for the precious metal and drive up its price.
- Government policies: Government policies such as taxes, import duties, and regulations on gold can also impact its price in India. For example, an increase in import duties on gold can increase the price of gold in the Indian market. The policy measures taken by the Indian government to control the supply and demand of gold have evolved since independence. The initial focus was on reducing demand and controlling supply through bans on imports and exports, control over production and refining, and restrictions on individual holdings and manufacturing of high-purity gold ornaments. Later, the focus shifted towards mobilizing domestic gold reserves through bond issues and conducting auctions. In recent years, liberalization has led to a relaxation of regulations and a broader range of gold products available for purchase.