A golden pause in the time of a crisis

In a recent appeal that has stirred both the jewellery markets and public discourse, Prime Minister Narendra Modi suggested seven ways for Indians to help the nation weather the economic impact of the ongoing West Asian crisis. Among these recommendations, ranging from working from home to reducing fuel consumption, the most debated one is the call to pause gold purchases for one year. While some view the suggestion with concern, a closer look at the economic rationale reveals a strategic move aimed at safeguarding the nation's financial health.

Why the call to avoid gold?

The reason behind Modi’s call is clear: India’s high dependence on imports. Approximately 90% of India’s gold consumption is fulfilled through imports, positioning gold as one of the largest drains on the country’s foreign exchange (forex) reserves. When Indians purchase gold, the country’s foreign currency reserves diminish as money flows out of the economy, rather than staying within it.

With the ongoing geopolitical instability, gold prices have surged by nearly 200% in the last three years, while Brent crude has increased by over 50% since the start of the West Asia crisis, pushing up India’s import bill. This has put enormous pressure on the Indian rupee, which recently breached the 95 mark against the US dollar. By encouraging a temporary halt in gold purchases, the government aims to curb this ‘dollar drain’ and give India’s forex reserves some much-needed breathing room.

Is this an alarm bell?

Some have perceived the appeal as an alarming sign, drawing comparisons to the stringent measures implemented during the COVID-19 pandemic. There is a concern that this could signal more drastic actions, such as steep hikes in fuel prices or increased import duties on gold.

However, looking at it objectively, this appeal can also be seen as a ‘Nation First’ economic strategy. The crisis in West Asia is far from a temporary conflict, and markets are now factoring in the possibility of prolonged instability. Protecting forex reserves, which could shrink from a comfortable 11 months of coverage to just 3-4 months under current trends, is becoming a necessity for the nation rather than a mere precautionary measure.

Should investors reconsider gold?

For investors, the real question is whether gold remains a safe haven in times of global uncertainty. Historically, gold has been a go-to asset during periods of market turbulence. In fact, the demand for gold ETFs in India reached its 11th consecutive month of inflows in April, underscoring its role as a stable investment.

For long-term investors, gold remains an important asset class for portfolio diversification. Yet, in the current climate, a more tactical approach may be necessary. Some investors are even considering exchanging old gold instead of buying new stock, which could help the economy by reducing the need for new imports. Gold purchases should, therefore, be made only after reviewing one's overall asset allocation, ensuring it aligns with long-term financial goals, rather than as a speculative investment.

The path ahead

Whether this appeal will succeed hinges on the symbolism of leadership. For the public to follow the prime minister’s call, political leaders and government officials must lead by example, demonstrating restraint in their own discretionary spending.

The broader goal of this appeal is to ensure that the government retains enough financial capacity to prioritise essential needs, such as defence and infrastructure, during a time of global crisis. While the immediate effect saw a dip in jewellery stocks such as Kalyan Jewellers and Titan, the long-term aim is to stabilise the nation's economic outlook and protect its financial sovereignty.

What does this mean for FIIs?

While some may perceive Modi’s suggestion as a cautious move, it is important to consider its impact on foreign institutional investors (FIIs). The prime minister’s statement, if it can swiftly impact a key sector, may raise concerns among FIIs regarding the stability and predictability of India's business environment. Such uncertainty could cause hesitation in investing in Indian equities, as FIIs may question the resilience of the market to such interventions.

On the other hand, this appeal could also signal to FIIs that New Delhi is taking necessary measures to stabilise the country’s financial health during a turbulent period. This might encourage them to shift their focus toward sectors less dependent on imports, such as domestic manufacturing or technology, where India’s growth potential remains strong despite global volatility.

Parimal Ade (X: @AdeParimal) is Founder, and Gaurav Jain (X: @gjyadnya) is Co-Founder, Investyadnya.in.

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.