India imported gold worth $340 billion since FY2008, as per a Kotak Institutional Equities report. The trends indicate, gold imports were double that of the previous year’s data in every month. It’s a fairly simple data. But it can imply so many things.
Here’s a look:
While Indians hoarded gold, foreign investors were busy investing $124 billion in Indian stocks between FY08 and FY17. So on one hand, dollars are being poured into the country by foreign investors. On the other hand, we are pushing the dollars out in exchange for gold. Now, the interesting part is this: Had Foreign Portfolio Investors (FPIs) not invested $124 billion, India’s trade and current account deficit would have shot up drastically. And when India owes the world more in foreign currency, the Indian rupee’s value falls. The rupee would have depreciated drastically, leading to inflation and a lot of economic troubles.
But there’s no point in worrying about high gold imports and asking for a clampdown. Had India not imported gold worth $300 billion, we may have had a marginal current account deficit, maybe even a surplus. This means the Indian rupee would have shot up in value. Imagine exchanging the 30-50 rupees for a dollar! But this is not necessarily good too. Such an appreciation would impact India’s exports. Remember, depreciation is good for exports—it makes goods seem cheaper in dollars.
“The sharp increase in gold imports up to FY2013 reflect the Indian citizens’ concerns about high inflation,” the Kotak report said. Generally, people hoard gold when inflation is high. So, a sudden increase in gold imports once again could mean people are unsure of low inflation levels. However, media reports report that the higher imports could be because of GST. Until recently, it was unclear how gold will be taxed under GST. So, jewelers may have hoarded gold in anticipation of higher taxes.
Irrespective of the reason for the rise in gold imports, one thing is clear—as investors, Indians are extremely risk-averse. When things go south, Indians look for safety in gold. Foreign investors, meanwhile, opt to invest in stocks even more during high inflation. “FPIs invested $96 billion in FY2010-14 out of the total $124 billion investment over FY2008-17,” the Kotak report said. India, meanwhile, imported $209 billion worth of gold in FY2010-14 out of the total $340 billion of imports over FY2008-17.
In December 2007, a gram of 24-karat gold was priced at Rs 1060. Today, it costs Rs 3045, as of June 22, 2017—three times higher. The value of FPI holding too increased three times over the same period. So far, the match is tied in terms of returns. However, the next decade could be different. This is because gold prices have been flat for the last few years. And the trend is unlikely to change in the near future. The stock market, on the other hand, has the potential to reap good returns thanks to reforms and economic growth.
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