Context
Gold prices have soared past the ₹1 lakh mark per 10 grams for the first time, driven by a surge in international rates following U.S. President Donald Trump’s announcement to revamp the Federal Reserve. Gold has further strengthened its status as the most reliable safe-haven asset amid turbulence in global financial markets.
Reason for gold prices crossing Rs 1 lakh-mark
Gold prices in India are rising, mirroring global trends, as international rates surpass $3,400 an ounce—up nearly 59% since March 2024.
· Gold prices are surging due to a weakening US dollar, uncertainty over US monetary policy following President Trump’s proposed Fed overhaul, and the Federal Reserve’s warning about tariff impacts.
· Investor confidence has been shaken by Trump’s criticism of the Fed and threats to dismiss Chair Jerome Powell, raising concerns about the Fed’s independence.
· These developments, along with ongoing US-China trade tensions, have driven the dollar to a three-year low and pushed gold to record highs.
· Meanwhile, geopolitical tensions, strong central bank buying, and inflation concerns continue to enhance gold’s safe-haven appeal.
About Indian Gold Market
India, the second-largest gold market after China, saw gold demand rise to 802.8 tonnes in 2024, up from 761 tonnes in 2023, while China’s demand stood at 985 tonnes. The value of India’s gold demand surged 31% to ₹5.15 lakh crore, according to the World Gold Council.
Implications on the Indian Economy:
Negative Effects:
1. Wider Current Account Deficit (CAD): India imports most of its gold. When prices rise, the import bill increases, worsening the CAD, which can weaken the rupee.
2. Pressure on Rupee: A higher import bill due to expensive gold increases demand for dollars, putting pressure on the Indian rupee.
3. Increased Inflation Risk: Rising gold prices can contribute to overall inflation, especially when gold is used in jewelry, which is a key part of Indian consumer spending.
Positive Effects:
1. Higher Value of Gold Holdings: Many Indian households hold significant gold reserves. Rising prices increase the value of their wealth, boosting perceived financial security.
2. Growth in Gold Loan Market: With higher gold prices, individuals can get larger loans against their gold. This boosts credit access, especially in rural and semi-urban areas.
3. Boost to Fintech and NBFCs: Non-banking financial companies and fintech firms offering gold loans see increased business, contributing to financial inclusion.
Conclusion
The sharp rise in gold prices presents a mixed bag for India. Given India’s cultural affinity for gold and its role in both consumption and investment, managing the economic impact of rising gold prices requires a careful balance encouraging financial inclusion while keeping macroeconomic stability in check. As prices continue to rise, gold will remain both a symbol of security for individuals and a sensitive economic indicator for the country.
