Monday, September 23, 2013

Why Prices of Gold could move up in India?
Rupee depreciation: Any depreciation in rupee could have an escalating effect on the gold prices as it makes imports costlier. Dr.Rajan had already indicated that one of the prime reasons for the Repo hike is to give stability to INR. Hence, there are ample chances of INR again slipping to Rs.64-65, against the current rate of Rs.62.23 for one USD. 

Gold import duty: Gold import duty has also added fuel to the rapidly increasing gold price. In order to contain the widening Current Account Deficit (CAD), the government  last month hiked the import duty on gold from existing 8% to 10%, which has led to a straight jump of more than 600 per 10 gram in gold prices. Prior to this hike, the government had twice hiked import duty from 4% to 6% and 8% respectively.

Geo-political tensions: Geopolitical tensions in Syria are one of the reasons that had triggered the hike in gold prices, only few weeks back. The situation in Syria is still volatile and a limited US strike cannot be ruled out. Speculations are also doing the rounds that Fed might further delay tapering of its bond buying programme if US forces attack Syria.

Low-level demand/ETF buying:
In the last month, SPDR gold trust, the world's largest gold-backed exchange-traded fund, has reported inflow, signalling renewed interest of market players. Apart from ETF buying, low-level buying in between festive and ensuring festive season could keep the price of gold buoyant.

Central Bank’s buying: International Monetary Fund (IMF) data has showed that central banks continued to add to their gold reserves. Turkey added the most by buying 22.5 tonnes of gold in July, while Russia's holdings topped 1,000 tonnes. The accumulation of gold by the central banks has underpinned demand for gold, which in turn has strengthened the metal’s price.

Loss in Confidence in the National Government: More and more Indians are losing faith in the current UPA government and are getting fed up due to the whimsical activities of the central bank. Moreover, a good number of scams have already shaked the confidence of many Indians, towards the current UPA government. In addition to this leaked out funds from the GOI's various welfare schemes, like:
  • Pradhan Mantri Gram Sadak Yojana,
  • Swarnajayanti Gram Swarozgar Yojanaa
  • Sampoorn Gramin Rojgar Yojana
  • Mahatma Gandhi National Rural Employment Guarantee Act
  • Sampoorn Gramin Rojgar Yojana
  • Pradhan Mantri Gramoday Yojana
  • National Rural Livelihood Mission
  • Rashtriya Swasthya Bima Yojana
are either finding their way into the broader market or the government spending in such funds is increasing India's Fiscal Deficit, leading to pressure on inflation. Moreover, the GOI of talking of giving a DA hike to its employees, which could further put pressure on the India's nagging fiscal deficit. Also, the Food Security Bill is likely to intensify the pressure on India's FD going forward, especial from FY15. In addition to this Dr.Raghuram Rajan has completely presented an opposite trajectory of the future interest rate scenario as compared to his earlier predecessor, Dr.Subbaro, who said the inflation is on the downward territory and interest could come down. In such a situation, since gold is supposed to be a hedge against rising interest rate and inflation, it could be one of the best investment instruments. 

Source: Adopted (Edited Version) from Zee Business