With inflation ruling at near eight-year peak, investors might resort to gold investment, especially due to high volatility in equities and other securities, as a hedge against price rise.
“Our regression analysis suggests that a 1 per cent point increase in inflation leads to 2.6 per cent rise in gold demand. While the economic ramifications of persistently high inflation, stretched equity market valuations, recent losses in equity markets retail investors and still low deposit rates can make a case for gold as an alternative asset class for the households in the near term,” UBS Securities India said in a report.
Gold imports rose 33.34 per cent to USD 46.14 billion in FY22 to 837 tonnes or 1.5 times above the pandemic low in FY21 and 12 per cent more than the pre-pandemic average of FY16-20, leading to a higher current account deficit that’s seen at 3 per cent of GDP, government data showed last month.
Gold imports of India, the second largest consumer in the world, stood at USD 34.62 billion in the pandemic-hit FY21.
After a record USD 54 billion worth of imports in FY13, inward gold shipments were shrinking and had come down to USD 28 billion in FY20 but then began to rise again and scaled USD 25 billion in FY21 and further to a tad over USD 46 billion FY22.
Gold imports are expected to marginally decline to USD 43 billion in FY23, according to UBS Securities India report released on Monday.
The surge in gold imports in the last fiscal contributed to the widening of the trade deficit to USD 192.41 billion as against USD 102.62 billion in FY21.
The imports are largely driven by the jewellery industry. The gems & jewellery exports grew about 50 per cent to about USD 39 billion in FY22. Current account deficit widened to USD 23 billion or 2.7 per cent of GDP in the first three quarters, according to the RBI data.
Gold has gained importance as an investment asset over the years, and is viewed as a good hedge in the event of the rupee fall and against inflation in the short-term. Notably, gold’s long-term returns over the past 15 years have outperformed equities and debt, despite these asset classes moving broadly in the same direction, according to the report.
The report also added that higher prices, however, may act as a deterrent and restrain investment demand. Accordingly, its chief India economist Tanvee Gupta Jain, expects gold demand to slow to 750 tonnes in FY23 down from 837 tonnes in FY22.
