Gold Prices and Financial Stability in India

RBI Working Paper Series, WPS (DEPR): 02/2012

26 Pages Posted: 20 Jan 2014

Date Written: February 28, 2012

Abstract

There has been an almost sustained rise in the international gold prices since 2002, with just one deep correction in 2008. As gold is an integral part of savings of a large number of investors, this has raised apprehensions whether any correction in gold prices will have destabilising implications on the financial markets. In this backdrop, the paper makes an attempt to analyse the implications of the correction in gold prices on financial stability in India.

The paper covers empirical analysis on the inter-linkages between domestic and international gold prices and then it examines the nature of changes in the factors affecting international gold prices during the last two decades. While validating empirically the existence of complete inter-linkages between domestic and international gold prices, the paper goes on to conclude that there has been a structural shift in the factors affecting international gold prices in 2003. Short-run volatility in international gold prices used to be traditional factors such as international commodity prices, US dollar exchange rate and equity prices. However, since 2003, the same is largely due to the volatility in the US dollar exchange rate and mildly due to volatility in equity prices.

In conclusion, the findings of the paper show that domestic and international gold prices are closely interlinked. Based on empirical evidences, the paper also concludes that implications of correction in gold prices on the Indian financial markets are likely to be muted.

Keywords: Gold, Financial Stability, Financial Markets, Asset Price Bubble.

JEL Classification: E44, G01, G10, G12

Suggested Citation

Mishra, Rabi N. and G, Jagan Mohan, Gold Prices and Financial Stability in India (February 28, 2012). RBI Working Paper Series, WPS (DEPR): 02/2012, Available at SSRN: https://ssrn.com/abstract=2162782 or http://dx.doi.org/10.2139/ssrn.2162782

Rabi N. Mishra (Contact Author)

Reserve Bank of India ( email )

Central Office, Shaheed Bhagat Singh Marg
Fort
Mumbai, 400001
India

Jagan Mohan G

Reserve Bank of India ( email )

World Trade Centre
Cuffe Parade
Mumbai, Maharashtra 400005
India
+91 22 2215 3426 (Phone)

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