Why India’s real interest rates are moving up, affecting gold

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Dec. 4 2020, Updated 10:50 a.m. ET

India’s real interest rates

Tracking China and India’s inflation figures can give you insight into gold prices’ future direction. It also provides you a look into gold-backed exchange-traded funds (or ETFs) like the SPDR Gold Shares (GLD).

Investors gain insight into gold stocks like Goldcorp Inc. (GG), Barrick Gold Corp. (ABX), Newmont Mining Corporation (NEM), Kinross (KGC), and Yamana Gold (AUY) as well as ETFs like the Gold Miners Index (GDX).

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Tracking real interest rates

We’ll take the ten-year government bond yield as the nominal interest rate in India. We’ll take the consumer price index (or CPI) change year-over-year as India’s inflation.

CPI data is released by the India Central Statistical Organization (or ICSO) monthly. It measures the average change in the general price level for a basket of consumer goods and services over time.

Inflation on a downtrend

According to the latest data, inflation for October was 5.5% year-over-year, compared to 6.5% year-over-year in September. Growth in the CPI averaged 8% since 2005. Consumer price inflation was higher than benchmark interest rates and government bond yields for a long time. This results in negative real interest rates, which has discouraged savers. Approximately 70% of overall savings moved from financial assets to physical assets like gold and real estate.

But now, things are changing. Inflation has decreased rapidly in 2014. It was 8.79% year-over-year in January 2014.

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Rising real interest rates

In India, the yield on the ten-year government bond is currently running at 8.30%. Adjusted for 5.5% inflation, the real return comes in at 2.7%. Real interest rates have moved up rapidly in last few months because of declining inflation, while nominal interest rates haven’t changed much.

Gold still popular among rural population

Increasing real interest rates could motivate some urban gold investors to move to other investments. But the majority of India’s population is rural. They don’t have easy access to banks and other investment options. Gold is an easy and available investment option for them. To an extent, it maintains their purchasing power. This makes gold one of the most popular investments.

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