India, a country enriched with culture both long and wide, has had a long-standing love for a precious metal called Gold. Be it weddings, ceremonies, festivals or religious occasions, this yellow metal has become an immanent part of Indian culture. India accounts for a large chunk of global gold consumption, ranking one of the top spots on the gold demand followed along with China and the United States. With a large demand to the tune of 790+ metric tonnes which is predicted to cross the 800 mark by the end of the year. But to understand what roles gold play in the economy and how consumption can have both positive and adverse effects on the economy, we need to look back in time to how gold paved its way to the global podium and why India has an ever-loving relationship with it.


The world is often considered to be driven by money, from the policymakers to the common households. We often hear poverty, global hunger etc spiralling globally. But can’t governments or central banks of the world just print money to match or stop global poverty? Why is the US dollar considered the world’s currency of exchange?

Well, the answer lies in the history of gold. To be precise “The Classic Golden Standard” dates to 1821, a monetary system in which money or currency was printed against gold. This initiated the use of paper money, as receipts were being billed against the gold that was stored. Through this most currencies around the globe were pegged to gold. This seemed like a justified system at the time as money was easily convertible and did not require the amount of intricacy in calculations of the 21st century.

But in the 1930’s owing to the great depression posts the World War 1, countries like US & UK sought to trade in gold and commodities as the stock markets crashed. This led to a rise in the price of gold and the public kept exchanging their savings for gold, which had a cascading effect on banks. The distrust in financial institutions led to hoarding gold as it maintained a high value. As demand increased, the gold reserves began depleting at an alarming rate due to which the central banks increased Interest rates to dissuade depletion and increase the value of the currency.

This, however, worsened the economic situation for firms and businesses which led to unemployment, bankruptcy and to a temporary closure of banks in the US. To curtail the situation, the Gold standard was abolished. Banks & the populous were made to turn in the Gold to the national reserve in exchange for dollars. An export ban on Gold also took place to sustain any leakage into foreign markets.

This created the largest gold reserve of that time “The Gold reserve of FORT KNOX”. Due to the constant volatility across global markets, which led to the framework of the Bretton Woods Agreement. Which was a conference which hosted delegates from 44 countries in New Hampshire. The agenda was to create an efficient monetary exchange system, promoting international economic growth. Although most Asian countries went unrepresented, India was an active participant.

Since the US owned about two third of the Global gold reserve played a crucial role in policy making and eventually it was decided that all currencies be linked to the dollar which was further linked to Gold. This conference also led to the creation of two entities the International Monetary fund & the World bank. This system laid stability to global markets but leveraged its volatility in the US. The US however invested in deeply running deficits and therefore the dollars in existence kept increasing and the reserves depleting due to global demand. This led to the de-linkage of gold to the US dollar.

Post this, currencies were often traded at floating rates which meant it was either based off other currencies or a bundle of currencies. Fiat currencies were adopted which were basically backed by a country’s Government rather than a physical commodity.

Now that we understand the overview of how gold played a role in global economies, let us now understand India’s current situation which ever-changing currency and gold reserves sparking new headlines with the often contradictions stating the future of India.


The Reserve Bank of India (RBI) states that all banknotes issued are backed by Gold, Government Securities & Foreign currency assets. (Section 33 of RBI act, 1934). However, the gold standard seizes to exist, none of the world’s countries use this form of a monetary system. But why do governments, central banks of the world still put out gold reserve figures and link them to currency volatility?

Well, believe it or not, it’s the same reason Indian households have a certain amount of gold despite having bank accounts and other financial instruments.


It’s the leverage against uncertainty. The RBI maintains a certain reserve as gold coin or bullion to hedge against loss of value or confidence in the rupee. India is currently a Net importing nation and therefore such gold reserves acts as a tool to buy and sell foreign currency. For instance, consider the below chart stating the foreign exchange reserves in India,

As you can observe a major downward dip over the last year due to the current external crisis of the US federal banks increasing Interest rates & the Russia-Ukraine war. The recent spike in the graph is due to the revaluation of the weaker US dollar and overseas investment flows. One important point to note is that the current percentage of Gold is 7.31% of the total foreign exchange reserve.

The above chart states the gold reserve held with the RBI over the years. This provides a positive figure as compared to the foreign reserve graph, stating a growth potential. This shows that the RBI is looking to diversify its Forex assets. In fact, central banks of the world have often looked to gold reserves and the popularity of investing in such reserves has spurned out of the war, where countries have been dissuaded by the dollar due to sanctions and have invested in gold. Gold being the most liquid asset among other financial instruments has been the driving force for the RBI over the years. However, the depletion in reserves in recent months owes to stabilizing of the Indian Rupee and the devaluation of other currencies held as foreign reserves that have an indirect impact due to the Dollar change.

To understand how currencies are stabilized, we can take for instance the current market situation, 1 Dollar = 81.70 Rupees. To stop it from falling further, the government looks to foreign reserves where they sell Dollars in exchange for Rupees, which increases the demand and therefore the value of the rupee appreciates and vice versa. Currency devaluation is the deliberate downward arrangement of a currency’s value and is not always a negative aspect since a weaker currency may attract foreign investments and increase exports which further appreciate the currency in the long run.

The reason RBI has taken steps to maintain a reserve system comes from the crisis of 1991, where almost all foreign reserves were depleted. India was required to take a loan for which they placed a large sum of gold as collateral.

So when the Dollar depreciates the RBI can seek opportunities and invest in Gold. Apart from financial institutions, we move on to the major market for Indian consumers that have created the second largest demand for this yellow metal globally.


The Indian jewellery market over the years has turned to a more streamlined and organized sector testing the markets of independent retailer dominance & national retail stores. The Gold industry as a whole contributes to about 1.3% of the GDP. The demand for gold is majorly fulfilled by this market, bearing the brunt of the risk of high prices and further selling them to the end consumer.

The major issues faced by small retailers who normally target rural buyers are the financing and capital required to withstand the rising prices. On the other hand, the national sellers have an advantage in holding a line of credit to be more adaptable to regulations accordingly.

Gold refining and gold recycling are also major players in this space accounting for looking into “Old gold”. The problems refineries face are the verification process that can hinder the convertibility quotient of accepting gold in exchange for cash and therefore the sector within the gold industry remains unorganized.

Another, aspect to consider is India being the largest exporter of gold & gem jewellery. UAE is one of India’s major customers, picking up the exports during May due to the India-UAE Comprehensive Economic Partnership Agreement (CEPA) terminating the 5% import duty.

However, the dip in exports does not show a prospective sign in terms of trade deficit, however, this dip can be assigned to a rise in US interest rates, the slowdown in Europe and the zero covid policy in China.


India’s gold consumption seems to be growing and it is predicted to touch 800-850 tonnes by the end of 2022. However, one must understand that India is a net import nation that imports a large amount of gold owing to the high demand. This demand may show positive results, but don’t be fooled as such imports can also widen the trade deficits and can put pressure on the volatile rupee.

Such imports also hold a high import duty which in turn raises the overall price of retail gold being sold. And with the Dollar appreciating it only becomes more expensive for India to keep importing gold. But the beauty of the Indian markets lies in the Indian demand. Even though the government increased Gold Import duty to 15%to curtail the current account deficit, gold jewellery demand in India in the third quarter of 2022 went up by 17% to 146 tonnes as per the World Gold Council.

In recent months following the wedding season along with the auspicious festival Akshaya Tritiya the effect of price increase on consumption dampens, maintaining the overall demand. So as other markets may seem to refrain from the purchase due to a hike in price or may only seem to invest in gold if inflation rises, India on the other hand defies both the demand angle as well as the inflation angle setting it apart due to its cultural diversity.

In India, middle-income households account for 50% of annual gold intake. The rural buyers however find it difficult to cope with the rising prices which could be cautionary signs for gold demand in the future ahead. As per the national household survey of gold consumption done by the Indian Gold policy centre (IGPC), the majority of the cash payments and more than 70% of Indian households own gold in some form or the other. The figures seem large but what we need to see is the leakage that is being formed due to this. A lot of money or the monetary value of gold is being hoarded and not circulated back into the economy which is hindering the Indian growth potential. It often brings similarities to the times of The Golden Standard where people hoarded gold which depleted gold reserves and ended up taking back the gold owned by the public. Hopefully, the situation does not take place in India as a majority don’t look to prioritize saving and investment when it comes to buying jewellery.

With the induction of new policies and financial instruments, Digital Gold (ETF) or paper gold has been driving interest among the masses and can be a safer investment being purer too (99.5% purity of gold). With the rise of UPI payments, various companies such as Paytm, Phonepe have introduced a virtual way of investing without possession, and store the bought gold in their own vault, providing a more user-friendly platform to buy gold. However, India will still need time to adapt to these new norms as gold is still looked at as a physical asset more than a financial instrument.

The prediction for gold demand can be highly volatile depending on the global markets, especially with the rate hikes by the Federal bank to control inflation could affect Indian gold rates. As the inflation rate reduces, the gold rates may fall which could in turn entice commodity investors to take advantage of this drop. However, the rate change may depend on numerous factors and only time can tell where the demand for gold lies in the near future.

-Aaron Cardozo
Junior Editor, TJEF

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