By Hemant Sharma Have you ever bought gold and noticed the price difference between the domestic gold price and the global gold price? Well, the reasoning behind this is a complex interplay of a variety of factors like currency exchange rates, import duties, global spot prices, local premiums, etc., but the main determinants of the gold price in India are the global gold prices.
This makes knowing the interconnection between these factors important, especially in times of growing volatility. In this blog, we will explore the influence of international markets on domestic gold prices.
Global benchmarks
Gold prices are traded on international commodity exchanges in terms of dollars per troy ounce. Global benchmarks like the London Bullion Market Association (LBMA) and COMEX in New York set the international spot price. These gold prices fluctuate 24/7 based on global supply, geopolitical tensions, and institutional trading volumes.
If the global gold price rises, gold prices in India tend to follow suit as India imports the majority of its gold demand. Thus, price movement in international markets is the first major driver of domestic gold rates.
USD-INR exchange rate
Following the international price, the next key element that influences domestic gold prices is the USD-INR exchange rate. Gold is priced in global markets in US dollars; the fluctuating rupee value against the dollar directly influences the gold price in India. If the rupee weakens against the dollar, the imported gold price rises automatically, and if the rupee strengthens, domestic gold prices can decline.
This is the reason why, even with a steady global spot price, the gold price in Delhi or Mumbai may rise, due to currency volatilities being another factor added to the price calculation.
U.S. Federal Reserve interest rates
The monetary policy of the US Federal Reserve serves as the steering wheel for global trends in gold prices. There tends to be an inverse correlation between interest rates and gold prices. If there is an increase in interest rates by the Federal Reserve, the Dollar rises, and because gold does not pay interest or dividends, its appeal as an investment option decreases.
In contrast, when the US Fed announces rate cuts or inflation is anticipated, gold becomes the preferred asset, which leads to a rise in global spot prices, and in turn, domestic gold prices also rise.
Global economic events
International economic events, like policy decisions, geopolitical situations, economic uncertainty, and inflation, all have a big impact on gold prices. Whenever there is economic or political uncertainty, investors all over the world rush towards gold as it is considered the best hedge to preserve purchasing value in the face of these uncertainties. Gold is also being bought by many central banks, along with increased inflows into Gold ETFs.
Therefore, after a rally in global markets, local gold prices often tend to follow within hours or the next trading session, and vice versa.
Import duties and domestic tax structures
Given the dependence of India on imports to meet its gold requirements, government duties also play a significant role in determining the domestic gold prices in India. Import duty, customs duties, along with the GST, are added to the landed cost of gold, thereby making it relatively expensive at the retail level. An increase in import duties leads to higher gold prices, whereas a reduction in duties can slightly bring down the gold prices.
These duties are assessed based on international rates and are periodically reviewed by authorities. Therefore, budget statements and subsequent revisions have to be seen as factors that directly impact the gold price across different Indian cities.
Conclusion
What investors finally pay at home for gold is dependent on a chain of events that start at the international market, pass through exchange rates, import duties, and ultimately culminate in investors’ locality with local demand added. When investors are tracking gold prices daily, tracking international factors along with domestic ones helps investors better understand gold price fluctuations.