June 19, 2024

Gold’s Role in India’s Inflation Battle

In India, the problem with inflation shows most clearly when you examine the country’s current level of gold trade and importation. Shipments have increased to 800 metric tons from 557 tons in the last year. That is an all time high and forecasts say that the number is still rising.

The purchase of all this gold shows clearly the concerns that investors have regarding the local economy and the central bank’s battle with inflation.

Why Buy Gold?

“Gold is being used as a store of value to protect against never ending inflation,” according to the head of fixed income at Canara Robeco Asset Management Ltd., Ritesh Jain.

It makes sense, since in India gold is historically and culturally tied to the concepts of wealth and prosperity. Investors are used to buying into gold either as a physical asset or on the exchange market where gold can be purchased and traded without ever taking physical possession. And while the value of gold has climbed in India—the value of the rupee and of the bonds that support the central bank have not done nearly as well.

The Inflation Situation

In the last year alone, more investment dollars flowed out of India’s economy than in. Global funds sold $250 million more shares in Indian companies than they bought. Meanwhile, inflation has been on the rise, such that food prices have risen by 18.3% in the final weeks of 2010.Citizens and politicians alike are calling for actions to be taken to curb this inflation—all the while investing in more and more gold.