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It was largely anticipated that gold prices could hover in a range for some time. It was as if investors had a hunch that gold prices were at their peak. Yet, a sharp fall in international gold prices over the past few days took everyone by surprise. As India looks to attract more foreign capital flows, this fall in gold prices could just be the good news India needs to be an attractive investment destination.
Here are pointers that explain why falling gold prices could be good news for India:
- Indian gold imports high: Any fall in international gold prices brings down the value of overall imports. Between April to December 2012, India imported US$ 37.8bn worth of gold according to recent RBI data. This is not significantly lower than the US$ 41.7bn imported during the corresponding period in 2011. This is despite India imposing a hike in the import duty of gold. A sharp fall in the value of gold, assuming a similar quantity of imports, could mean a lower current account deficit. Gold imports contributed to nearly 30% of India's trade deficit (excess of imports over exports) during 2009-10 to 2011-12, which is significantly higher than the 20% during 2006-07 to 2008-09, a working committee of RBI observed in its report.
- RBI wants gold imports to go down: In a speech last month, RBI governor D Subbarao, called India's import of gold a 'deadweight burden'. India's current account deficit or CAD touched a record high of 6.7% to the gross domestic product or GDP. The current account deficit occurs when a country owes more in foreign currency to other countries than it receives. Rising gold imports widen the gap further. "Import of gold, largely as a hedge against in?ation, is a deadweight burden, especially at a time when the CAD is beyond the sustainable level," Subbarao said in his speech. RBI was not in favour of Indians buying gold for investment. As investors cut exposure to gold, India could import less gold.
- Falling gold prices indicates improved investor confidence: International investors are selling gold. They believe they have better avenues to deploy money than gold. This shows that the investor's appetite to take risks is higher than earlier. A large investment in gold indicates that investors are not willing to bet on any future growth. However, a sharp selloff in gold means investors are willing to deploy money into other investment avenues. This is music to Indian finance minister P Chidambaram's ears, as he sells the India story to foreign institutional investors in North America.
- What it means for India's stock market: A high current account deficit leads to a weak currency and high inflation in an economy. Gold imports, which widen India's current account deficit, could decline in value. This could in turn reduce the current account deficit. The rupee could remain stable or strengthen. FIIs do not like to aggressively buy in countries where the current account deficit or inflation is running high. India was losing favour amongst foreign investors as the other economies were doing a better job of reining in inflation and the current account deficit. The fall in gold prices could allow India to rein in the country's current account deficit to some extent.
Labels: management
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