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 about 18 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 appreciated 0.9 percent, the most in three months, to 54.145 per dollar in Mumbai yesterday on optimism falling oil and gold costs will trim the deficit. The currency’s climb pared its loss in the past 12 months to 4.9 percent.