Gold is known for its sentimental value and it helps in safeguarding your investment in the long run. This yellow metal acts as an ideal source of investment in the event of economic inflation, stagflation, etc. So, even though there is market fluctuation, the price of gold remains intact. Besides, the price of gold fluctuates during festive seasons. Apart from this, its price varies across locations. For example, gold rates in Indore may differ from Jabalpur. Keep reading to know about the impact of gold rate fluctuation on the Indian economy.
What is the Effect of Fluctuation in Gold Rate on Indian Economy?
Following are the main impact of gold rate fluctuations on the economy of India:
Impact on Current Account Deficit (CAD)
Imports of gold openly influence the current account deficit (CAD) of India. In general, with an increase in CAD, it appears risky for the economy of a nation. A country that has a current account deficit is expected to import more than the amount of exports. At present, India imports more gold than other countries. This is why, when the online rate of gold fluctuates and the price reaches its peak, imports become expensive, and CAD gets increased, thereby affecting the economy.
Imports Become Costlier
With the fluctuation in gold rate, importing gold turns expensive. Furthermore, an increase in importing of gold causes the escalation of CAD, thereby making the government increase import tariff which further raises the price. Thus, purchasing gold has turned expensive, also influencing the economy.
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People Save More
Gold has been an ideal solution for funding and savings among Indian residents. It is used as an investment option for several reasons. Since a considerable portion of people’s savings are often in gold, they tend to hold on until they are required, which causes a negative effect on the economy.
Impact on Jewellery Business
With the fluctuation of gold rate, the price of gold jewellery will tend to escalate, leading export business to stagnate. This way, it affects an economy partly or wholly. Also, the changes in government regulations that comprise foreign investment, budget decisions, and industry procedures influence the value of precious metals thereby affecting the jewellery business in India.
Which Elements Affect the Gold Prices in India?
The key elements that influence the price of gold in India are discussed below:
Demand and Supply
Gold is a popular long-term asset, the supply of which remains constant for years. In case of any marriage occasion, cultural or religious festival, demand for gold increases, and its price also escalates at a similar pace.
Therefore, demand and supply are two crucial factors affecting the rate of gold. If you determine that there are chances that the price of gold might increase in future, you can make your investment immediately and gain high returns. On the contrary, if prices are expected to fall, it is sensible to invest later.
Keep in mind that the demand for gold varies from one city to another in India. For instance, southern states have a high demand for this precious metal around the year. So, owing to the difference in demand, the gold rate in Andhra Pradesh, Karnataka, Kerala, etc. varies from the gold rate in Jharkhand, West Bengal, Rajasthan, Delhi, etc.
In the event of inflation, the value of money falls in an economy and investing under such circumstances is highly risk-prone. Although during inflation, the relative value of currency reduces by a significant margin, there is no change in the intrinsic value of gold. This means you will need to pay a high amount of money to buy this precious metal.
Rate of Interest
Gold is a popular income instrument, the price of which has been inversely related to the current rates of interest. With an decrease in interest rates in the market, you tend to invest in gold for gaining substantial returns. On the contrary, with increase in interest rate, you may start to invest in deposits, thereby reducing its price and demand.
The Reserve Bank of India reserves gold alongside cash, securities, bonds and so on. With the reduction in overall supply of gold, there is an increase in the cash flow within an economy. Due to its high demand, price of this precious metal escalates considerably, thereby making the price of gold differ as per the amount sold from reserves.
Another factor that causes uncertainty and imbalance in the market, thereby making various assets lose their value, is geopolitical turmoil. However, as gold keeps its intrinsic value intact, individuals tend to buy this precious yellow metal by liquidating other assets. Furthermore, this escalating demand also upsurges the price of gold in the Indian market.
Indian Jewellery Market
Usually, the demand towards gold jewellery and ornaments in the Indian jewellery market moves up especially during marriages or festivals. As mentioned before that the demand for gold items varies from one city to another across India, the gold rate in Indore is much different from West Bengal and other states, owing to their different wedding rituals, cultures, and festivals.
Having a crystal-clear idea about the impact of gold rate fluctuations alongside the factors affecting gold prices may help facilitate your gold investment process. Now after knowing about the upward trend in gold prices, if you are interested in availing a loan against your gold asset, visit the websites of different lenders, compare their offers and make prudent decisions.