The likely financial stability implications of a correction in gold prices would be less severe for India, according to a Reserve Bank of India working paper on ‘Gold Prices and Financial Stability in India'.

Since gold is bought mostly by households as an alternative saving avenue and to meet their social/cultural needs and not for speculative purposes, the implications of a correction in gold prices on the Indian financial markets are likely to be muted.

Theoretically, the severity of a correction in any asset prices, including gold, on the financial system depends on the nature of the ownership of the asset.

Contrarian view

“Even empirical analysis provides credence to the view that any deep correction in gold prices would not have any adverse implications for financial stability.

“In fact, the empirical results of this study provide support to a contrarian view that any correction in gold prices would cause a stabilising impact on the financial indicators of the financial system,” said the paper authored by senior RBI officials Dr Rabi N. Mishra and Mr G. Jagan Mohan.

The paper said a sharp reversal in gold prices would, in fact, be reflective of improvement in global conditions, especially, those in the US. The substitution of gold for equity and other riskier assets would thus offset the systemic impact of gold prices, if any.

Despite the recent sharp rise in India, demand for gold has sustained not only as a component of safe saving but also due to its social and cultural importance.

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