In India, nothing is as good as gold. Even as gold prices in global markets declined — they fell from over $1,600 an ounce in March this year to around $1,250 an ounce in just two days in April, before going back up to about $1,370 currently — the increase in import duty to 10 per cent and an extension of an 80/20 rule (20 per cent of all imports have to be re-exported) pushed gold prices up to Rs 32,000 for 10 grams in August, 20 per cent higher than they were in June this year. In spite of that, gold imports in July amounted to $2.9 billion, up from $2.45 billion in June. In all likelihood, prices will go higher now that the festival season has begun; a lot of the new demand will come — as it has in past years — from rural India. Farmers, who expect to reap a bumper crop this year on the back of a very good monsoon, will be among the biggest buyers. In 2010, gold consumption was 2.6 per cent of gross domestic product, and that went up to 3 per cent in 2011: Indians’ love affair with gold is a well-known story, at least partly because of that kind of behaviour.
In the last two years, imports of gold have exacerbated the current-account deficit — they are the second biggest item on India’s import bill after oil — and most ways to force a reduction have failed. A significant part of the depreciation of the rupee’s value is attributable to this insatiable demand for the yellow metal. Now, the increase in import duty is having a perverse effect: media reports in Dubai and Singapore talk of a sharp increase in gold purchases by visitors from India. The continuing depreciation of the rupee is making gold even more expensive, even as the demand for the precious metal is indirectly the cause for that very decline in the currency’s purchasing power. Both the price of gold and the rupee’s exchange rate are connected to the American Federal Reserve’s monetary policy and, in particular, to whether the Fed’s bond-buying program — otherwise known as QE3, the third quantitative easing cycle — will taper off soon, reducing capital flows into emerging markets like India; funding the current account deficit is becoming a much more difficult task. The price of gold is also an index of fear about the stability of India’s monetary and banking system. By that measure, it is frightening.