'India's gold appetite, one of the reasons for Rupee depreciation'
India's rising gold appetite may have caused the steep fall in value of the Rupee. Gold consumption has remained strong in the country despite rising prices, according to Macquarie Securities.
India is the world’s largest consumer of gold in tonnage terms. Considering that most of India’s gold demand is met through imports, it is resulting in a widening current account deficit and a depreciating rupee but, at the same, in the appreciation of wealth of Indian households on sharp rises in gold prices.
Gold consumption in India (including jewellery and net retail investment) in volume terms is still holding up strong at 5% YoY during the first three quarters of 2011 on top of 72% YoY growth registered in 2010. This is in spite of a 64% cumulative increase in gold prices (in rupee terms) between January 2010 and September 2011.
The rupee has depreciated by 18.6% against the US$ since August 2011 to be the worst-performing currency in the AXJ region. One of the key reasons for India’s weak relative performance compared to other AXJ currencies is that India runs a high current account deficit, while most other Asian countries have a current account surplus; it is running a high fiscal deficit; and domestic growth is slowing.
Why? Because India imports to meet most of its gold demand.
Gold imports are the third-largest of India’s merchandise imports after crude oil and capital goods. Indeed, total gold imports (in gross terms) accounted for a 9.6% share in India’s total imports as of FY11. … this has widened India’s current account deficit by ~40bps over the last three years.Adjusting India’s US$44bn (2.6% of GDP as of FY11) current account deficit with net gold imports, the overall deficit would reduce by almost half to US$21bn (1.2% of GDP). Our estimates suggest that net gold imports alone contributed nearly 40bps to the 130bps widening of India’s current account deficit between FY08 and FY11.
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