By Naman Mishra & Palakh Jain
As India navigates a complex economic landscape marked by both challenges and opportunities, gold remains a key asset for wealth preservation and a bellwether for investor sentiment.
Gold’s enduring allure in India is no mere cultural relic — it is a dynamic asset intricately linked to economic fundamentals. As the Indian economy navigates global uncertainties and domestic pressures, gold prices have witnessed significant upward momentum. This refined analysis delves into the economic factors behind the rising gold prices in India, substantiated by official facts and figures from leading sources such as the Reserve Bank of India (RBI), the World Gold Council, and the Ministry of Finance.
Economic fundamentals driving gold prices
Global economic instability — from trade tensions to geopolitical unrest — has heightened investor caution in recent years. In such times, gold stands out as a safe haven. This phenomenon is not unique to global markets; economic factors have also played a crucial role in India. A key economic driver is the depreciation of the Indian rupee. Since gold is priced internationally in US dollars, any weakening of the rupee amplifies local gold prices.
According to the RBI’s latest statistics, the rupee depreciated by nearly 8% against the US dollar over the past 12 months, a trend that has translated into approximately a 10–12% rise in domestic gold prices over the same period (RBI, 2024). Inflationary pressures are another significant factor. With persistent inflation impacting the cost of living and eroding real income, investors increasingly turn to gold as a hedge against inflation. This is particularly true in an environment where conventional savings and fixed-income instruments fail to keep pace with inflation. The RBI and Ministry of Finance have both noted that inflation-adjusted returns on gold have outperformed many traditional asset classes in recent years, making it an attractive alternative for risk-averse investors.
Domestic demand, supply constraints, and investment shifts
India’s cultural predilection for gold — symbolizing wealth and auspiciousness — remains a potent driver of domestic demand. However, this cultural demand is now complemented by pragmatic investment decisions. Data from the World Gold Council reveal that in 2023, India imported nearly 450 tonnes of gold, marking an increase from 400 tonnes in 2022 (World Bank, 2023). This surge is not solely a cultural phenomenon but reflects a strategic shift towards gold as a means of portfolio diversification in the face of economic volatility.
The economic rationale behind this shift is twofold. First, with stock markets experiencing heightened volatility, Indian investors are rebalancing their portfolios to include more stable assets. Second, supply constraints in the domestic mining sector necessitate a reliance on imports, which, coupled with a depreciating rupee, further escalates gold prices. Import duties and logistical challenges have also contributed to the supply-demand imbalance.
While the government has been exploring measures to boost domestic production and curb excessive import dependence, such policies require time to translate into meaningful price adjustments. Additionally, the increasing popularity of gold-backed financial instruments such as Gold Exchange-Traded Funds (ETFs) and sovereign gold bonds is reshaping the investment landscape. These instruments offer the twin benefits of liquidity and safety,
allowing investors to gain exposure to gold without the challenges of physical storage and security. The Economic Times reports that inflows into gold ETFs have surged by over 25% in the last fiscal year, underscoring a broader trend towards formal financial instruments in gold investment (RBI, 2024).
Policy interventions and their economic implications
Government policy plays a pivotal role in steering economic behavior, and gold is no exception. Over the past few years, the Government of India has introduced several initiatives aimed at modernizing the gold market. The promotion of sovereign gold bonds, for instance, is designed to reduce the reliance on physical gold while simultaneously curbing the circulation of unaccounted wealth. These bonds offer investors a government-backed alternative to physical gold, with the added advantage of interest payouts.
Although these instruments have not yet replaced traditional gold purchases entirely, they signal a strategic shift in policy aimed at stabilizing the domestic gold market. Moreover, the RBI’s monetary policy has been central to managing inflation and stabilizing the rupee. In response to inflationary pressures, the RBI has taken steps to tighten monetary conditions, albeit with careful calibration to avoid stifling economic growth. However, even minor policy adjustments can have outsized effects on market sentiment.
A delay in tightening monetary policy or perceived inefficacies in curbing inflation can drive investors towards safe-haven assets such as gold. Thus, monetary policy, while indirectly, remains a crucial determinant of gold prices. Fiscal measures, too, have been pivotal. The Ministry of Finance has implemented strategies to streamline import procedures and rationalize duties on gold, aiming to balance the trade deficit while ensuring that the domestic market remains competitive. However, these measures also have a double-edged effect; while they help in managing the current account deficit, they can also lead to short-term price volatility as market participants adjust to the new regulatory framework.
Navigating uncertainty and economic resilience
Looking ahead, the trajectory of gold prices in India is likely to remain upward, albeit with potential fluctuations influenced by both global and domestic economic developments. Analysts forecast that as long as global uncertainties persist and the rupee continues to face downward pressure, gold will maintain its status as a preferred store of value. This is especially pertinent given the ongoing challenges in other sectors of the economy, such as real estate and equities, where volatility remains the norm.
However, there is cautious optimism among policymakers and economists. Structural reforms in the banking and financial sectors, along with initiatives to boost domestic manufacturing and reduce import dependency, could eventually mitigate some of the pressures on the rupee. If successful, these reforms might stabilize gold prices over the medium term. Yet, in the near term, investors are likely to continue viewing gold as a critical hedge against economic and geopolitical risks.
The rising gold prices in India are a multifaceted economic phenomenon rooted in both global uncertainties and domestic fiscal dynamics. The depreciation of the rupee, persistent inflation, robust cultural and investment demand, and deliberate government policy measures all contribute to the upward trend. Official data from the RBI and the Ministry of Finance, coupled with insights from the World Gold Council, underscore that this trend is supported by solid economic fundamentals.
As India navigates a complex economic landscape marked by both challenges and opportunities, gold remains a key asset for wealth preservation and a bellwether for investor sentiment. For investors and policymakers alike, understanding these economic drivers is crucial. As long as global risks persist and domestic reforms take time to yield results, gold’s status as a safe haven is likely to endure. Whether viewed as a cultural treasure or an economic safeguard, gold’s increasing price in India reflects a broader narrative of resilience and strategic adaptation in the face of economic uncertainty.
(Naman Mishra is a PhD scholar, School of Management, Bennett University; Palakh Jain is a senior visiting fellow at Pahle India Foundation and Associate Professor at School of Management, Bennett University.)
The views expressed are not necessarily those of The South Asian Times
