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Gold and the Indian Rupee Analysis

Commodities / Gold and Silver 2014 Jan 02, 2014 - 11:06 AM GMT

By: Submissions


Srinivasan Rangaraj  writes: The weak balance of trade (i.e. imports greatly exceed over exports) terribly pushed down the value of the rupee against the dollar on 28th August 2013. That is to say the rupee hit 68.85 against the greenback.

India faced an all time high of 4.8 percent deficit in its current account (balance of trade) during the previous fiscal.

Heavy gold imports and withdrawal of funds by foreign institutional investors by their huge selling off, with the expectation of scaling down of bond buying program by the Federal Reserve were the main cause for this giant current account deficit (CAD). 

However, the actions of the government of India and the Reserve bank of India (RBI) with regard to rein in of gold imports have yielded reasonable results in the reduction of gold imports. The government hiked the import duty of gold from 2% to 10%, and RBI stipulated a condition for gold importers that 20% of their imported gold had to be reexported.
The shrinking of gold imports and the timely actions of present RBI Governor Mr. Ragu Rajan, allowing “Foreign currency Non Residents (Banks)” swap arrangements and hiking money market rates to lessen speculation held further the sliding of the value of the rupee and elevated it persistently. It is now hovering around 62. However, even now, it is yet to recover from the 14 percent drop when we see it on an annual basis.

The above mentioned measures of the government and RBI brought down CAD at 1.2 percent in the 2nd quarter of 2013. These measures also increased the flow of foreign capital continuously into the country for the past six weeks. Consequently, the foreign exchange reserve of India was at $295 billion in the middle of December 2013.  

The international gold prices reduced by 28 % in 2013. The local gold prices plummeted only by 3.5% thanks to the aforesaid measures.

The Federal Reserve stated that since the US economy was improving, it had decided to reduce the stimulus bond purchase program by $10 billion every month from $85 billion to $ 75 billion, from January 2014 onwards. However, it told further that it probably would keep low federal fund interest rates at 0-25 %, mainly till inflation rate remained below its 2% target level, even if the unemployment rate plummeted below 6.5 %.

The reasons for contraction in the prices of metals after the announcement of the Fed tapering is that the loose monetary policy of the Federal Reserve usually increased the flow of the dollar and crashed down its value and simultaneously enhanced and kept the value of gold, silver, copper, etc high for a longer period. Hence, the tightening announcement of the Fed bond purchase program pushed down the prices of metals and lifted the value of the green back against the major other currencies and most of the US economic data released recently were  positive and confirms the Federal Reserve’s statement that US economy is improving.

Fixing the CAD for this financial year as less than 3 percent RBI recently stated that the delay in reducing the bond buying program brought back foreign capital into the country, and narrowed down big gap in CAD and the nation was gearing up for US Federal Reserve’ scaling down. The apex bank also expects that consequence of the reduction will likely be less and temporary phenomenon. 

I think that while the Fed Tapering will likely to push down the international gold prices by enhancing the value of the dollar globally, the recent measures of government and RBI and the Fed’s commitment on keeping the low interest rates will likely to keep the foreign exchange reserves at the satisfactory level.
Hence, I guess that though there may be some fall in the rates of Indian gold prices and the rupee value, the gold price and rupee value in India will not likely to drop off drastically.



© 2013 Copyright  Srinivasan Rangaraj   - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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