The gold rout may narrow India’s record current-account deficit, easing pressure on the rupee, damping inflation and boosting scope for a further reduction in interest rates.
Gold purchases account for more than two-thirds of the deficit, which reached $32.6 billion in the quarter ended Dec. 31, according to the Reserve Bank of India. The metal’s 17.4 percent plunge in 2013 could help cut import costs by almost $7 billion in the 12 months ending March 2014, Barclays Plc said.
India’s finance minister is visiting North America to woo investors as a slide in foreign direct investment increases reliance on more volatile stock and bond inflows to fund the trade imbalance. The shortfall, along with price pressures, has restricted the central bank to a 50 basis-point rate reduction this year even with economic expansion at a decade low.
“The recent fall in commodity prices, including gold, has come as manna from heaven for the Indian economy,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. “If the trend is sustained and reduces the current-account deficit and inflation, that will give the Reserve Bank more breathing space on easing policy.”
The rupee, down 4.7 percent in the past 12 months, appreciated 0.2 percent to 54.045 per dollar as of 4:09 p.m. in Mumbai, climbing for a second day on optimism falling oil and gold costs will trim the deficit. The BSE India Sensitive Index slipped 0.1 percent. The yield on the 8.15 percent government bond due June 2022 fell to 7.81 percent from 7.82 percent.
The gold slide dented a 12-year rally and included the biggest selloff since 1983. Fears that Cyprus and other European nations may have to sell some of their holdings sparked the drop, according to Goldman Sachs Group Inc.
The trend of lower commodity costs will “ease” pressure on the rupee and curb inflation if it continues, said Amol Agrawal, an economist at STCI Primary Dealer Ltd. in Mumbai.
The fall in gold may help contain price gains in other Asian nations.
Indonesia’s headline inflation in May will fall 0.27 percentage points if the metal’s price stays at current levels, according to Australia & New Zealand Banking Group Ltd. Core inflation in 2013 may be less than 4.5 percent if gold extends its decline, Bank Indonesia Deputy Governor Perry Warjiyo said in Jakarta today.
India’s wholesale-price inflation cooled to 5.96 percent in March, the slowest in more than three years. At the same time, consumer prices rose more than 10 percent.
The current-account imbalance was 6.7 percent of gross domestic product in October-to-December, the widest in Reserve Bank data starting 1949. The central bank has said a deficit of 2.5 percent of GDP is the desired level. Subdued exports amid an uneven global recovery have contributed to the gap.
“The drop in commodity prices, particularly in gold and crude oil, if sustained, could be a major positive driver for India,” Siddhartha Sanyal, chief India economist at Barclays in Mumbai, wrote in a note. The slide may pare the current-account deficit in the current fiscal year to about 3.2 percent of GDP from a baseline estimate of 4.1 percent, he said.
The nation’s banks will review loans backed by gold and call for more collateral as the price of the metal falls, according to Rajiv Takru, secretary for financial services at the Finance Ministry.
India, the world’s largest bullion buyer, has raised taxes on gold imports to try and curb demand. The metal is bought during festivals and marriages as part of the bridal trousseau or gifted in the form of jewelry by relatives.
The higher levies are part of wider policy reforms since September to spur Asia’s No. 3 economy, such as opening the retail and aviation industries to more investment from abroad.
Chidambaram has spearheaded the changes ahead of elections due by May 2014. Plans to ease foreign direct investment caps may be submitted to the Cabinet as early as June, he said in an interview in Toronto on April 15.
The gold drop may signal a challenge to the push to attract overseas capital if it suggests investors are becoming more wary of riskier assets, said Rajeev Malik, an economist at CLSA Asia-Pacific Markets in Singapore.
“Don’t expect aggressive monetary policy easing from the Reserve Bank” because of price pressures and a potential recovery in economic expansion, he said.
Reserve Bank Governor Duvvuri Subbarao cut the repurchase rate by a quarter point in January and March, to 7.5 percent. The central bank said in last month’s policy statement that the “headroom” for further monetary easing remains limited.
Slowing wholesale-price inflation has boosted the odds of monetary-policy easing to support economic growth, said Raghuram Rajan, the top adviser in India’s Finance Ministry.
“It increases the probability of more accommodative monetary policy,” Rajan said in an interview yesterday. “Whether it pushes it up a huge amount or a little bit is hard to say.”
Elevated consumer-price inflation has yet to cool significantly and is a constraint on the Reserve Bank, according to Rajan, who is traveling with Chidambaram.
India’s GDP rose 5 percent last fiscal year, the weakest pace since 2003, the statistics agency estimates.
Plans to introduce inflation-linked bonds may further cool demand for gold in India, providing an alternative to the metal as a hedge against inflation.
“We are working on an auction process that will be conducted for the inflation-indexed bonds, including for the retail segment, and we would like to keep that segment as large as possible,” Reserve Bank Deputy Governor Urjit Patel said in Boston yesterday. “We would like it to take place in the first half of this fiscal year.”
Elsewhere in the region, Singapore’s non-oil domestic exports fell for a second month in March from a year earlier. New Zealand’s consumer prices rose last quarter by less than economists forecast. South Korea’s producer prices fell last month from a year earlier.