GDP growth falls to 6.5%

In what seems to be a one way slide, India’s GDP growth slowed down yet again with both the quarterly and annual numbers coming out lower than last year’s comparable period.

This has been a sad story for quite a while now, and that the growth in the current fiscal is even worse than the 2008 – 09 period where the global economy was close to falling off a cliff shows that India’s growth story and the dreams of a demographic dividend are turning into a nightmare.

Here is a chart that shows the GDP growth from 2002 till date.

 

India Annual GDP Growth 2002 - 2012
India Annual GDP Growth 2002 - 2012

As you can see – the worst year in quite some time was 2008-09 when the sub-prime mortgage crisis in the US shook the whole world, and last year’s growth is even worse than that!

Imagine what would happen if the Euro crisis gets worse and the economy gets another shock from there – it won’t be surprising if the GDP growth for this year dips under 4% if that were to happen.

 

The role of exchange rates in gold prices

You don’t think about currency exchange rates when you are buying gold because the two are generally not talked about together, and most people buying jewelery would perhaps be surprised to hear that the exchange rate has any bearing on gold prices at all.

However since India, and much of the rest of the world imports most of their gold for which they have to pay in a foreign currency, the price of gold domestically is impacted by the exchange rate much like the price of oil.

A good way to visualize this is to see how gold prices moved in 2012 priced in different currencies.  (Data from GoldPrice)

 

Gold price movement in 2012
Gold price movement in 2012

Part of this price difference is exchange rate, and part of it is domestic demand and supply, but I think it is really hard, if not impossible to distinguish which is which.

I think the relationship between USD INR and gold prices is going to be talked about a lot in the next few years because the Rupee has become a floating currency and it will continue to move a lot and gold is becoming more of a financial asset than anything else and that will mean that the demand also depends on people’s appetite of gold as a financial asset instead of just jewelry.