Gold bear market: What does it mean for India?
Falling gold prices spell good news for India, especially since huge gold imports was one of the key reasons for the country‘s worsening current account deficit.
April 16, 2013 / 13:57 IST
Moneycontrol Bureau
Among those rejoicing over the steep decline in gold prices will be Finance Minister P Chidambaram, who has been long appealing to the masses to stop hoarding the yellow metal. Falling gold prices spell good news for India, especially since huge gold imports was one of the key reasons for the country’s worsening current account deficit.Ambit Capital analyst Gaurav Mehta has listed five key implications of falling gold prices, for the Indian economy.* With gold imports contributing to over 50% of the current account deficit in CY12, clearly a drop in gold prices should help lower India’s CAD. This should in turn provide a significant boost to the risk perception surrounding the rupee.* A related fallout of the point outlined above is a drop in imported inflation which can pave the way for lower interest rates.* Over half of India’s household savings are in physical assets, mostly gold and real estate. A sustained bear market in gold may help move money to either more productive, economy-boosting investments or to plain consumption of other goods and services.* With only 2-5% of India's household savings flowing into equity markets, a decline in prices of competing asset classes can result in asset allocation towards financial assets, especially equities, given falling bond yields.* An unprecedented gold bear market may have effects that are hard to think through. For example, the questions raised on the very business models of some gold finance companies recently was perhaps beyond anticipation a few months ago. Similarly how the 'wealth effect' will affect the economy and businesses is something worth pondering about.
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