WGC Report: For every 1% increase in inflation, gold demand increases in India by 2.6%

The World Gold Council has launched a report titled ‘The drivers of Indian gold demand’, the first in a series of in-depth analyses on the Indian gold market. Using an econometric model, it draws on three decades of annual data, dating from 1990 to 2020, to gauge some of the principal influences driving gold demand in India.
The report assesses gold demand from a range of perspectives, both quantitative and qualitative. It considers the findings of a comprehensive analysis of the long- and short-run determinants of Indian gold demand and examines demographic, socio-economic, and related developments that are likely to shape gold demand in the country, now and in the future.
The econometric analysis shows that rising income is the most powerful driver of Indian gold demand in the long term, which bodes well for Indian gold demand as the economy is complemented by a strong demographic dividend. 
Somasundaram PR, Regional CEO-India, World Gold Council, commented: “Our latest research reinforces the fact that the drivers of gold demand in India are many and varied. Cultural affinity, long-held tradition and festive gifting play a significant role. However, these qualitative factors are complemented by quantitative aspects, which have jointly shaped India’s demand for gold over the last three decades, such as household income, the gold price, and inflation, which is a key issue facing investors in India today. The report is based on a comprehensive econometric analysis that highlights the most potent drivers of Indian gold demand in the short and long term. It further delves into aspects of Indian demographics and economic development at a crucial juncture, helping us understand gold demand today as well as in the future. We, at the World Gold Council, are confident that these findings will shape industry strategy around reinforcing established conventions and developing new ways to attract and sustain demand in the future”.
The report finds that for each 1% increase in gross national income per capita, gold demand rises by 0.9%. Also, factors that influence short-term demand for gold are in common with investors around the world, Indian savers turn to gold as a hedge against inflation. For each 1%-point increase in inflation, gold demand increases by 2.6%; while steady price increases or decreases affect long-term demand; and even a 1% increase in rainfall, compared to the long-run average, boosts gold demand by 0.2%.
The report says that demand future gold demand in India may be more subdued than expected this year. Imports remain strong and retail demand is expected to pick up. In 2022, looking ahead, if the industry takes steps to become more transparent, more standardised and more in line with global peers, India’s gold market would most likely benefit from positive demographics and socioeconomic changes.
As per the Report, 3 focus areas would allow gold to retain its long-held position as a valued asset across India. Trust factors like mandatory hallmarking, good delivery standards for gold bars and a gold spot exchange will drive a sea change in the Indian gold market, building trust among consumers and investors alike. A campaign explaining how to buy gold could inspire many potential gold investors. Digital tools and e-commerce platforms will drive accessibility and put gold on a par with other investment assets.
In general, jewellery demand is more influenced by long-term drivers while demand for gold bars and coins tends to respond more sharply to short-term factors, such as inflation or tax. Consumption patterns also differ between rural and urban consumers. Jewellery is considered both an investment and adornment in rural areas. City dwellers tend to consider bars and coins as their preferred forms of investment.

Aruna Gaitonde, Editor in Chief of the Asian Bureau, Rough&Polished