How the RBI’s repo rate hike could affect Gold rates?

Gold prices this week for those wanting to track, have been reported of trading stable or range-bound. The international spot markets recorded Gold at $1292.89 per ounce on Monday. But, by the start of Friday, it climbed back to levels of $1300 ($1300.88) per ounce. Most analysts were surprised to observe Gold and Dollar trading almost in a similar vein until Wednesday.

A probability of the US Federal Reserve increasing interest rates in the coming week looked all the more ominous after an upbeat report on the state of the economy. Higher interest rates would improve the Dollar’s strength, and thereby pressurize Gold. A Reuters report quoted an analyst suggesting that in the event the US Federal Reserve hiked interest-rates, Gold could move to support levels of $1280 per ounce. But, on Thursday, the US Dollar index lost by 0.13% to slip to 93.48 against a basket of reserve currencies, and the spotlight was back on geopolitical concerns and US tariffs, which offered the yellow metal a gentle nudge to sustain itself at $1300 levels. While some preferred to call it a flat movement, many referred to it as a resistance of sorts too.

Back home in India, Thursday heralded something that the Reserve Bank had avoided for nearly 54 months- a repo rate hike. The RBI’s three-day monetary policy meeting concluded with the six-member committee unanimously agreeing to a 25 basis point or 0.25% hike, upgrading repo rates at 6.25% and reverse repo rates at 6%. The last rate hike was announced by RBI in January 2014 when the repo rate was increased to 8%. Until Wednesday, the central bank had either reduced rates or maintained a status quo. The announcement saw the stock markets cheering, and a renewed buying into PSU bank stocks too. The announcement was called unfair by prospective home buyers and people who were forced to re-calculate their EMIs, but retired personnel were rejoicing at the probability of a rise in their savings deposits.

Traders and local jewelers were talking of how the repo rate might affect Gold pricing. Although the RBI’s announcement is a sudden and drastic one, (it arrived after 4.5 years) it does not seem to majorly affect prospects for the yellow metal. Let us take a look at the reasons. One of the major factors affecting Gold prices are the currency valuations, local taxes and the demand among jewelers- factors that set the spot prices. Remember, India is still the second largest consumer of Gold after China. Conventional economics suggests that an increase in repo rates results in an appreciation for the domestic currency.

With an increase in interest rates, the value of interest yielding securities or debt securities also increases, and there is a possibility that foreign investors may want to increase their domestic investments, thereby helping the value of the domestic currency. The rupee closed 23 paise higher against the US dollar on Wednesday after RBI’s announcement. Although the RBI does not formulate its policy actions directly to boost the currency, analysts were quoted across as saying that the Rupee may consolidate its recent losses. In the words of Abhishek Bansal, founder and Chairman of Abans Group who was quoted by NDTV shortly after the repo-rate announcements, a short covering in USD-INR is expected. And, this was likely to make imported goods like Gold and Crude oil cheaper.

On Wednesday evening, prices of the Yellow metal slipped by Rs 5 per ten grams at the domestic market in New Delhi. The 24 karat Gold variant was selling at Rs 30815 per ten grams. Sustained industrial uptake helped silver strengthen price by Rs250 per kilo to Rs 39,645 per kilo.

On Thursday evening, however, rates across several cities rose by 0.03-0.3% or in the margin of Rs 1- 10 per gram. Would it be wiser to say that a repo rate announcement caused a drop in Gold prices Although there is a marginal impact, this is too insignificant to cheer about. Much of India’s Gold purchases are in Dollars, and hence any correction is likely to lead to discussions on cheaper gold. The hypothesis on a relationship between the Rupee and the price of Gold could be tested once again when the RBI monetary policy committee re-assembles for its July-August session.

Analysts and speculators in private huddles were reportedly discussing if the RBI would come up with a secondary rate-hike. A consensus is yet to be built around that line of thought yet, but the central bank will be prompted to gauge factors such as crude oil prices and the inflation. And not to miss the rising GDP. Meanwhile markets are awaiting for a major announcement from the Federal Reserve. There is an expectation that the US Dollar may get a boost post this announcement.

Courtesy: sify.com/ Image: Thinkstock