In spite of the changing trends and modernization, gold continues to be the most popular precious metal in India. It is not only popular for making ornaments, but also as a means of investment. Many people who still believe in the traditional methods of investment, opt for this precious metal. However, there seem to be heavy fluctuations in the price of gold in India nowadays and there are several factors which are responsible for these fluctuations. Let us study these factors in detail.
- International price of gold: One of the main factors behind the movement in gold prices in India is the international price of gold. Most of the domestic demand for gold in India is met by gold imports. Hence when the international prices rise, there is also a rise in the price of gold in India.
- Dollar value: When the dollar loses value, the price of gold rises and vice versa. This is because dollar is the most stable currency and when there is any turbulence global or domestic turbulence that can affect dollar’s strength, people’s investment in gold increases.
- Gold ETFs: There are other factors as well which affect the international price of gold. One such factor is the Gold Exchange-Traded Funds or ETFs. People invest in gold EFTs electronically and if there is a large redemption in these funds then it tends to affect the international price of gold, pushing the price lower.
- Demand for gold: Apart from these, the price of gold also depends on demand for the yellow metal from large consumption countries such as China and India. With most countries having high demand and lean seasons, gold prices also vary.
- Duties and other policy decisions: Any adverse policy decisions of government like imposing import duty on gold can affect the price of gold. Such duties make gold costlier in India which in turn affects consumption.
All these factors affect the price of gold in the international market and subsequently in India.
Rupee and the price of gold
The other important factor that affects the price of gold in the country is the movement of the rupee. When the rupee drops against the dollar in interbank trading, it causes an increase in the price of gold. This is the reason that it is necessary to keep an eye on the international price of gold along with the movement of the rupee against the dollar. If the price is steady for both then the price of gold will also be steady in the country.
The other factor affecting the price of gold is inflation rate. In the last few years there has been a high inflation rate in the country due to which the rate of gold has risen. This is not just true for gold but also for other commodities including food products. A rise in inflation causes a natural rise in the price of gold in the country.
Higher domestic gold inventories
India was the highest consumer of gold in the year 2014 and was second biggest after China in the first quarter of the current year. Due to the high domestic gold inventories, there was a drop in the demand for gold in the current times leading to a drop in the price of gold.
Concerns over monsoon
Farmers are the main factor leading to the demand of gold in the country. Due to a weak monsoon the farmers face financial difficulties leading to the sluggish demand for gold in the country. It is true that almost two thirds of the country’s demand for gold comes from rural areas. This is because jewelry is the traditional means of storing wealth for many rural Indians who do not have access to or faith in the formal banking system. This is the reason that when the monsoon is weak the demand for gold in the rural areas decreases and hence the price of gold falls.