Gold price crash to help improve BoP position, says Rangarajan

It will have a favourable impact on BoP because India is a big importer of gold and crude oil, he said

Sharp decline gold prices will have favourable impact on the economy especially the high current account deficit (CAD) and the overall Balance of Payment (BoP) position, Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan has said.

"It (decline in gold and crude oil prices) will have favourable impact on balance of payment (BoP) because India is a big importer of gold and crude oil," Rangarajan told PTI.

Gold prices fell to 21 month Rs 26,440 per 10 grams in the domestic markets on April 16 due to continued sell off in the global markets. Though there have been some recovery in gold prices in the spot as well as futures market, uncertainty looms large over the way prices would move going forward.

Gold prices had touched the all-time high of Rs 32,975 per ten gms on November 27, 2012.

Rangarajan said: "Substantial reduction in price of gold can bring abount significant benefits to the balance of payment."

Gold and crude account for about 40-45% of country's total imports.

Planning Commission Deputy Chairman Montek Singh Ahluwalia said the declining prices will "certainly make our macro economic balancing exercise easier...Now people will not rush into gold as an investment asset. They will look for other more productive assets. I think that would be good for the economy."

India's CAD, which is the difference between inflow and outflow of foreign exchange, widened to historic high of 6.7% of the Gross Domestic Product (GDP) for the quarter ended December 2012.

The softening of crude oil and gold prices will help in improving the CAD. Brent crude oil futures have seen a 10% price slide this month.

"While all efforts have been made to reduce the attractiveness of gold as an asset, there is still a large import of gold into the country", Rangarajan said.

However, some experts fear that declining prices may give rise to heightened demand of the gold.

Declining prices, according NCAER economist Rajesh Shukla, might spur the demand for gold rather than curbing it.

"I think domestic demand for gold is certainly going to increase. It might again become important avenue for investment for the people. Prices are crashing due to crash gold of prices in international markets not due to less demand in domestic markets," he argued.

Former Union Minister and noted economist Y K Alagh said:

"Price of gold has gone down. In short run would work in both way... Partly it would discourage people from buying but on the other hand people might feel that price of gold is low so this is time to buy it."

As regards the impact of price decline on external sector, Kotak Mahindra Bank Chief Economist Indranil Pan said: "Given an oil average of $100 a barrel and some benefit from gold, I expect CAD of the country at about 4% of the GDP in the current fiscal."

"To a certain extent, fall in crude oil prices will help reduce CAD by about $7-8 billion in the current fiscal," Pan added.

Crude oil prices have also fallen below $100 a barrel in the global futures market.