Gold prices in Delhi dropped to ₹1,48,900 per 10 grams as the Reserve Bank of India (RBI) raised the repo rate by 25 basis points to 5.50%. The decline reflects both global dollar strength and tighter domestic monetary policy, which increases the opportunity cost for holders of non-yielding assets like gold.
Gold prices in the domestic market retreated for the second consecutive session on Wednesday, with the price of 99.9% purity gold falling by ₹700 to settle at ₹1,48,900 per 10 grams in Delhi. This downward movement coincides with a significant shift in India’s monetary policy, as the Reserve Bank of India announced a 25 basis point hike in the repo rate, moving it to 5.50%. This marks the first such increase in nearly four years, accompanied by a shift toward a 'calibrated tightening' stance to address inflation.
Impact of Monetary Policy and Borrowing Costs
The central bank's move to raise interest rates has immediate implications for the broader economy. By increasing the repo rate, the cost of borrowing for banks increases, which typically leads to higher interest rates for consumers on loans and potentially more attractive returns on fixed-income investments like bank deposits. For investors, this creates a higher opportunity cost for holding non-yielding assets like physical gold. When interest-bearing assets begin to offer better returns, the appeal of gold, which does not generate interest or dividends, often faces pressure.
Global and Domestic Pressures
The domestic price correction is also being influenced by international trends. Spot gold prices dipped to approximately $4,116 per ounce as a robust US dollar, currently near an 18-month high, continues to weigh on bullion. Expectations of further US Federal Reserve interest rate hikes have intensified, with current market pricing suggesting a 70% probability of a rate increase in December. A stronger dollar makes gold, which is priced in the US currency, more expensive for buyers holding other currencies, thereby dampening global demand.
While the RBI has expressed confidence in the economic outlook, recently revising its FY27 GDP growth forecast for India upward to 7.1%, this growth does not always correlate with immediate gains for gold. Jewelry retailers and investors are currently managing a landscape of price volatility. Retailers, in particular, may face risks related to inventory valuation and potential margin erosion if the price correction continues, as demand often slows when prices fluctuate rapidly.
Monitoring Future Triggers
Moving forward, market participants are watching for further signals on interest rate trajectories from both the RBI and the US Federal Reserve. While the Indian central bank’s shift to 'calibrated tightening' aims to curb inflation, the speed and scale of future rate hikes will determine the cost of funds for lenders and consumers alike. Investors tracking the precious metals sector should monitor US inflation data and Federal Reserve meeting minutes, which will provide clues on the future direction of global interest rates and their subsequent impact on gold pricing.