How Inflation Impacts Gold Rate, Price, and Demand in India?

Undoubtedly, gold assets and jewelleries have a great importance in India. The country values this precious metal not only for investment, but its cultural value as well. People purchase gold jewellery for gifting purpose on weddings, festivals, occasions, and this is why India is also one of the largest consumers of gold in the world. Many invest in gold sovereign bonds, digital gold, equity based gold funds, gold bullions, and gold mutual funds, etc.

What Are the Uses of Gold Assets?

Realizing the increasing monetary value of the yellow metal, citizens also use it to fulfil their financial emergencies by taking a gold loan, where the jewellery is pledged with a bank or NBFC, against which borrower is provided funds. Apart from a loan against gold, you can even sell off the precious metal and earn monetary returns.

  • You can purchase or invest in gold to safeguard against financial uncertainty and volatility of the market and domestic economy.

  • Gold being a physical asset in form of jewellery, coin, bar, biscuit, etc is viewed as a rich monetary asset that does not lose value drastically.

  • You can buy gold when the domestic economy is going through a difficult time, because when gold prices increase, you can sell the asset to generate income at a profit.

  • It has been noticed that gold price face turbulence, but there has never been a time when this precious metal has not recovered its value.

Thus, gold has several utility aspects and is highly valuable. Now, whether you plan to purchase gold ornaments to wear on events, sell it for a profit or invest in it, knowing the recent current gold price is crucial because that will affect any income or funds generated from the yellow metal. Ups and downs in gold rate have a direct impact on the supply and demand of this precious metal in the market.

So what affects gold prices? Particularly, inflation of a domestic economy causes a major impact on the gold demand and prices. Let us thus understand inflation and its effects on gold rate and demand.

How Inflation Influences the Gold Rates?

Gold is usually purchased to hedge the inflationary condition when inflation of India’s domestic economy remains high for a long period. Given inflation, the price of the yellow metal also rises. Below-given is more information about impact of inflation on gold rates.

  1. Rupee Dollar Equation: When it comes to India, the global prices of gold remains unchanged with change in rupee-dollar equation. But, when inflation rises, the value of Indian currency against dollar goes does. It prompts individuals to hold more finances in form of gold because the price of gold remains unaffected due to the rupee-dollar effect.

On the other hand, gold prices in the international market get influenced by dollar’s value. So if the dollar’s value increases, there will be a decrease in gold prices, and vice-versa. So when Indian currency rises and value of dollar falls, the demand for gold increases so does its rates. Investors then invest in gold as it shares a low to negative relation with other monetary assets.

  1. Income of Citizens: When income level of citizens rises, the demand for gold also rises. Thus, we can say that the gold demand is impacted by the income of people. Similarly, when people are low on funds or their income level reduces, then investments in physical gold decreases to keep cash-flow undisturbed. During such a scenario, the sale of yellow metal increase along with its price.

  2. Effect on Loans against Gold: Now consider that gold price is at peak. Isn’t that a good time to take a gold loan, because a hike in the yellow metal’s price will mean a higher loan quantum on a limited gold available? For instance, if 10 gram of 24 carat gold costs Rs. 32,590 than Rs. 30,000, it is better to take out a loan in the former scenario.

Even after inflation, the gold loan cost is much lower than that of a personal loan or a credit card loan. A loan against gold being secured in nature, asks for a lower interest rate. It also provides a high mortgage value, up to 75% of the yellow’s metals current market price. So, during inflation if you want to take a loan, you can consider gold is an alternative to other high interest charging unsecured loans.

Factors Other Than Inflation Affecting Gold Rate and Demand

Inflation is not the only factor that affects the gold price, rate, and demand. There are few other factors as well.

  1. Stable Economy

Gold price and its interest rate (in terms of lending) share a negative relation when the country’s economy is stable. But when yields rise, people expect a stronger economy, which in turn may push up inflation. Individuals then wish to invest in fixed-income assets that give promised returns. But gold does not offer a fixed return, due to which, its demand declines, and price of this metal remains flat.

  1. Demand for Gold Due to Agriculture Sector

Demand for gold from the rural sector influences gold demand in India. The country faces demand of about 800 to 850 tonnes of gold from the rural areas. Thus, rural sector constitutes approximately about 60% of the total gold consumption in India.

The demand is usually high during the monsoons, because this is the time when agriculturists and farmers buy gold for income or to hedge financial emergencies. When crop production falls, then the farmers can sell gold or take a loan against the precious metal to improve cash-flow.


Inflation and deflation have a significant impact on the gold rates. It is thus the macro and micro economic aspects of India that affect the gold prices