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What are the factors that influence gold prices in India?

4 Mins 14 Mar 2022 0 COMMENT

It is extremely unlikely to come across someone who is not aware of the inherent value of gold, not only as a piece of jewellery or due to its auspiciousness, but as a strong asset which can possibly yield solid returns, especially in times of economic uncertainty. Owing to this fact, it becomes imperative for one to understand what really drives the prices of gold in India. In this article, we will try to understand the factors that influence the gold prices in India.

Let’s start with some basic but essential facts and figures. India happens to be one of the largest consumers of gold. The annual demand of gold in India is approximately equivalent to 25% of the global physical demand. This makes it all the more important to understand what determines the prices of gold here in India.

Relationship between gold prices and inflation

Let’s start with the relationship between gold prices and inflation, which is popularly phrased as “gold acts as a hedge against inflation”.

Inflation, simply put, is a decrease in the purchasing power of money which is reflected by a general increase in the prices of goods and services in an economy, and when inflation rates rise, the value of the currency decreases. Generally, inflation tends to be directly proportional to changes in the price of gold, which essentially means that higher levels of inflation will most likely result in high prices of gold due to the value of currency declining. This can be explained by the fact that people tend to hold wealth in the form of gold during inflationary periods, under the assumption that the value of gold remains stable in the long run as compared to that of currency, making it the most ideal hedge against inflation.

Impact of interest rates on gold prices

Generally, gold prices tend to have an inverse relationship with interest rates. The reason behind this can be possibly attributed to the fact that when interest rates fall, people don’t get desirable returns on any deposits they hold, and they believe that investing in gold would yield better returns, which leads to an increase in the demand for gold, and consequently an increase in its price as well. Conversely, when interest rates rise, people tend to sell their gold and instead put their money in deposits with the hopes of earning higher interest, which leads to a reduction in demand for gold, and consequently the price for it declines as well. However, historically, no direct correlation exists between gold prices and interest rates.

Impact of the Indian jewellery market on gold prices

One cannot ignore the impact of the Indian jewellery market on gold prices, owing to the cultural beliefs of the Indian population, so let’s try to understand the relationship between them.

All of us are aware of how integral gold is to Indian households, and even more so during the festive and wedding season. And, due to the increased consumer demand of gold in the festive season, prices go up. One interesting fact to note here is that according to a report by the World Gold Council (WGC) published back in 2019, Indian households have accumulated around 25,000 tonnes of gold collectively, which effectively makes India the largest holder of gold in the world.

Gold prices and Monsoon

Let’s now come to a rather interesting factor which impacts gold prices, which is a good monsoon season.

If we were to consider the numbers highlighted by reports, the rural segment of India accounts for approximately 60% of India’s consumption of gold jewellery, and annually India consumes about 700-800 metric tonnes of gold. These facts make rural gold demand a crucial factor in determining the overall demand for gold in India and consequently the prices of gold as well. The reason behind the correlation between good monsoon rains and gold prices is that a good monsoon season usually leads to good agricultural produce. This prompts farmers to spend a portion of their earnings in buying gold for a multitude of reasons and also as a safeguard if crops were to fail in subsequent harvesting seasons.

Impact of currency fluctuations and import duties on gold prices

Other than these factors, one should also consider the impact of currency fluctuations and import duties can have on gold prices. Since gold is traded in USD in international markets, any fluctuations in either USD or INR may impact gold prices in India. As an example, if INR were to weaken against USD, then chances are that the value of gold will increase in INR. India also imports a lot of gold, given the fact that it is one of the largest consumers of gold and 89% of the demand is fulfilled through import. Therefore, import duty also plays a vital role in determining gold prices in India.

Impact of geopolitical factors and uncertain outlooks on gold prices

As gold is considered to be a relatively safe investment by investors, the demand and subsequently the price of gold tends to increase during times of political instability, geopolitical turmoil or general economic slowdown. Other asset classes tend to witness a fall in their respective values during turbulent times which is generally not the case with gold, making it a suitable commodity to park funds during such times.

Impact of gold reserves on gold prices

Let’s finally come to the impact of government gold reserves on gold prices in India. The Reserve Bank of India along with the central banks of multiple other countries hold gold reserves along with currency. So, whenever such reserves start procuring more gold, the prices of gold tend to increase due to the resultant increase in the demand of gold.

Also Read: Gold’s recent correction offers a good opportunity to enter as long-term outlook is bullish


In conclusion, we can say that gold is a rather important commodity, especially when it comes to the preferences and beliefs of the Indian subcontinent, and leadingly a multitude of factors like the ones we discussed, and some others as well have a considerable impact on gold prices in India.

Disclaimer: ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a SEBI registered with SEBI as a Research Analyst vide registration no. INH000000990. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.