Indian households face risk of correction in gold prices: RBI

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Expressing concerns over decline in financial savings over the past few years, the Reserve Bank of India (RBI) on Friday said that households seem to have shifted their savings from assets earning low real rates to assets perceived as inflation-proof like gold which offered the highest returns among asset classes for majority of the years after the global financial crisis.

However, the central bank also cautioned that this has caused an above normal return which may not sustainable in the long term.

RBI, in its financial stability report, said that since Indian households held a significant quantity of it, they faced the risk of a correction in gold prices, which currently carries an 'uncertainty premium' that arose from risk aversion among investors in recent years.

The statement of RBI came on the backdrop of rising imports of gold in Indian economy which has worsened the current account deficit.

While India's share in international trade is less than 2 per cent and that in world GDP is less than 6 per cent in Purchasing Power Parity terms, it accounts for a quarter of world demand for gold, said RBI in a statement.

The measures taken by government, earlier this year, to curb demand of gold could reap benefits only in the short-term as demand in the September 2012 quarter picked up significantly and was higher than the average of last 5 years.

To curb its demand, RBI suggested that Gold linked financial products, which are not backed fully in physical form, could be used as hedge against inflation which will also help reduce its imports. It also said Inflation indexed bonds could also be one of the options to offer investors a hedge against inflation and dissuade them from gold investments.

Story first published: Saturday, December 29, 2012, 11:30 [IST]
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