How Gold Rate Fluctuation Affect the Indian Economy

In the foreign markets, gold prices plunged to two-year lows, falling by around 1.93% in September 2022. In the local markets, however, prices ended up practically flat as the value of the Indian rupee fell to historic lows.

The price of gold has been fluctuating in recent months due to several reasons like the Russia-Ukraine war, inflation, rise in Fed rates, rising crude oil prices, a falling currency, etc.

Gold price is a significant indicator of the economy’s health and is often used as a barometer to predict future economic events.

People often ask how much is gold worth. Gold’s value is highly dependent on the economic environment. Inflation, currency devaluations, economic growth and unemployment significantly impact the gold’s value. Here is a look at how gold rate fluctuations affect the economy.

What effect do gold rate fluctuations have on the Indian economy?

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Gold rate fluctuations can affect the Indian economy in the following manner:

1. Impact on Current Account Deficit (CAD)

Imports of gold directly impact India’s current account deficit (CAD). As a general rule, when the CAD is high, it is riskier for the entire economy. A country that has a current account deficit imports more than it exports.

The nation currently imports more gold than any other nation. After oil, gold is the commodity that is imported most frequently.

So, if the online gold rate fluctuates and prices are high, imports will become costlier, and CAD will widen, affecting the economy.

2. Imports become costlier

As the gold rates fluctuate, importing gold becomes costlier. Moreover, since importing more gold increases the CAD, the government increases the import tariff, which further increases the cost. Overall, buying gold has become expensive and affects the Indian economy.

3. People tend to save more

For a significant portion of India’s residents, gold is one of the finest solutions for protection and savings. Gold is held with higher respect for other investment options for various reasons.

Because a sizable portion of people’s savings is placed in gold, they are inclined to hold onto those funds until they are required, which hurts the economy. Since this gold does not circulate through the economy as a whole, it has no contribution.

4. Impact on the gold jewellery business

If the gold rate fluctuates, the price of gold jewellery will also rise to cause the export business to become stagnant. Thus, this could affect the economy as a whole.

Why do gold prices fluctuate?

People must know the worth of gold when selling or buying gold. Gold prices fluctuate due to various reasons; some of them are:

  • Supply and demand are the primary factors affecting the gold rate in the market. The price of gold will increase if there is a greater demand than supply, and it will decrease if the opposite is true.
  • Since gold is a store of value, it is a great tool for inflation hedging. As a result, when there is inflation, its value does not fall as much as other assets. One explanation for the price of gold is that the price often increases during periods of high inflation due to the increased demand for the metal.
  • The price of gold decreases as interest rates increase and increases when interest rates decrease. Since there are more options for investors to get a return on their capital elsewhere when interest rates are high, they invest less money in gold.
  • Geopolitical developments have an impact on the worth of gold. Investors may turn to gold as an asset if a nation undergoes political or economic unrest as a strategy to secure their money.

Conclusion

In times of impending uncertainty, selling gold for cash is a great method to protect one’s wealth. In particular, when the economy is facing a downturn, it is a smart idea to keep some gold on hand. Moreover, before selling, know the price of gold to get the best deal.

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