Sunday, May 26, 2024

India’s rich have little trust in the future of local currency


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Large gold imports are a reason behind Rupee depreciation

By Nantoo Banerjee

Between 2014 and 2023, India’s gold imports had gone up from 638 tonnes to 780.7 tonnes. The gold price in the country calculated on the basis of 24 karat per 10 grams went up, respectively, from Rs.28,000 to Rs73,750 during this period. The exchange value of Indian Rupee dropped from Rs.59.90 in May 2014 to a US$ to Rs.83.32 in April, 2024. Since long, India has been the world’s second largest gold importer. India’s rich have always gone for gold to substantially protect their wealth. The high demand for gold is linked with the low demand for Rupee among the rich. Rich Indians hold massive surplus wealth in Rupee. The country’s top one percent population holds 40 percent of its wealth. Like any other asset, the value of a currency is determined by its demand and supply. India’s rich are flush with Rupee funds. For them, gold is a much more desirable asset than the paper currency.
Investments in stocks and real estates have been among other popular ways to protect the massive Rupee earnings of the country’s rich. This explains why the demand for gold has always outstripped the demand for Rupee. Ironically, India remains as one of the world’s poorest countries in terms of per capita income. According to the IMF World Economic Outlook, GDP (nominal) per capita of India in 2024 is projected at US$2,848 at current prices, placing India at 143rd position out of 195 global economies. The income share of the country’s top one percent ranks among the highest in the world, only behind a few small countries such as Peru and Yemen.
The factors that normally affect the value of a national currency are: demand for the currency and its supply; interest rates; economic performance; inflationary trend; GDP growth; unemployment rate; national debt; and political stability. As mentioned earlier, the demand for Indian Rupee (INR) is low among the rich, the single largest controller of the country’s wealth including INR stocks. The supply of INR far exceeds its demand among the rich. INR is in demand among the poor and there is no supply shortage.
The interest rates are an issue. They are important determinants of exchange rates. A currency value rises when interest rates are high as investors always look for best rates to earn higher return. For many years, interest rates in India have stayed even lower than the inflation rates. The country’s import-led economic performance is hardly impressive despite its rising GDP. The import cost of gold and diamonds, mostly for personal use, is the second highest after petroleum. This is simply ridiculous for a generally poor country like India. And, the government seems to be afraid of offending the rich and the upper middle class by curtailing the gold import.
The price inflation has also not been under control as the decision for interest rate fixation to contain inflation is taken more often under political pressure mainly to appease local big business houses than for economic justification. It is another matter that bigtime fund borrowers from government-controlled banks are also bigtime debt offenders. The government refuses to learn. It rarely seeks to offend bigtime gold importers and the Mumbai-based Bullion Merchants’ Association which is known to enjoy an excellent rapport with the World Gold Council.
The country has also failed to create enough employment to strengthen its economy. Low unemployment is an important indicator of a strong economy which increases demand for a country’s currency. Higher unemployment is reflective of a weaker economy. While interest rates are among the most important determinants of exchange rates, nations with large public debts are also less attractive to overseas investors. Higher interest rates attract higher foreign capital inflow raising the demand and value of a currency. Large public debts often result in inflation.
Given the country’s overall economic scenario which has not changed much over the years despite the government’s tall public claims, India’s Rupee-flush rich have gone for the easy option of converting their surplus cash wealth into gold. The price of gold does not seem to matter much to them. On April 20, 10 grams of 24k gold (99.9 percent) reached Rs.74,870. The continuously large investment in gold has been further bringing down the value of INR. Driven by robust demand, gold imports to India surged 26.7 percent to $35.95 billion during April-December, last year, compared to the same period in the previous year. In December alone, imports of the precious yellow metal skyrocketed by 156.5 percent to $3 billion. Switzerland remains the largest source of gold imports, accounting for around 41 percent share, followed by the United Arab Emirates, South Africa, Peru and Ghana.
Interestingly, gold imports in India went up substantially with the expansion of the circulation of Rupee in the last 10 years under the present government. Gold imports stood at 638 metric tonnes in 2013-14. Last year, the yellow metal imports touched 800 tonnes. In the last five years, the gold demand was held between the range of 700 and 800 tonnes. According to P.R. Somasundaram, chief executive officer of the World Gold Council’s Indian operations, the demand is expected to rise between 800 and 900 tonnes, this year. This may not be good news in so far as the exchange value of INR is concerned. The exchange rate touched Rs.83.355 for a US$ on April 27. Depending on the result of the current parliamentary election, the price of gold may shoot up further during the current year and INR may lose its exchange value close to Rs.95 before the end of 2024. A 6.8 percent GDP growth projection for India during 2024-25 by the IMF alone will not be able to halt INR’s downhill journey. (IPA Service)


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