Gold Prices Surge, Exposing Savers to Liquidity Risks: Kotak Warns

Gold Price Surge Raises Concerns for Indian Economy

Kotak Institutional Equities has identified key areas of concern amidst the sharp rise in gold prices, which has boosted household wealth but also poses significant risks to the economy.

Key Figures:

• The value of gold held by Indian households has surged to approximately $5 trillion, equivalent to nearly 125% of GDP.
• Gold now accounts for around 65% of the non-property wealth of Indian households.

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Concerns:

The brokerage notes that the benefits of rising gold value are limited, as gold holdings are widely distributed among low-income households, whose consumption behavior is unlikely to change significantly. Gold's nature as a store of value, a store of wealth, and as jewelry restricts its use as a productive asset. Loans against gold remain one of the few productive uses, but account for a small share of overall and retail lending.

Macroeconomic Risks:

Households' gold purchases represent a conversion of financial savings into physical assets, tantamount to exports of household capital. This dynamic could lead to a drawdown of RBI foreign exchange reserves, reflected in lower net foreign currency assets on the central bank's balance sheet. This, in turn, could curtail reserve money creation and system liquidity, weighing on deposit growth unless offset by RBI's durable liquidity injections.

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Comparison of Gold Imports to Other Investment Flows:

• Net gold and precious stone imports of approximately $500 billion over FY2011 to 10MFY26 dwarf foreign portfolio investment flows into debt and equity of around $200 billion.
• These gold imports are comparable to combined foreign portfolio and direct investment flows of around $600 billion over the same period.