RBI Holds Repo Rate At 6.5%: How Does Key Interest Rate Impact Gold Prices In India?

Gold rates in India have surged more than 20% in the last 12- months. The price of yellow metal in India has almost tripled in 10 years, with the rate rising above 900% in a decade. The rate of gold is significantly impacted by the benchmark interest rate in the country and the six-member MPC led by RBI governor Shaktikanta Das has decided to keep the repo rate unchanged at the rate of 6.5% for the eighth time in a row. RBI's decision comes after other central banks globally are trimming key rates. At the latest, the European Central Bank has cut interest rates at its June meeting taking the rate to 3.75% from 4%. However, investors are waiting with bated breath for the Fed to cut rates.

The US Federal Reserve is expecting three rate cuts in the later of 2024, however, the timeframe is yet to be announced by the officials. Nonetheless, the market and experts are hoping for the onset of rate cuts in H2 of the current year. Meanwhile, RBI has kept rates unchanged along with the policy stance of 'withdrawal of accommodation' since April 2023 policy. RBI monetary policy continues to be actively disinflationary to ensure anchoring of inflation expectations and fuller transmission.

In India, headline retail inflation remained largely unchanged at 4.83% in April, slightly down from 4.85% in March. However, food inflation increased to 8.7% in April 2024, up from 8.52% in March. Meanwhile, core CPI inflation (excluding food and fuel components) remained virtually unchanged at 3.4% in April 2024, providing some relief.

Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers said,

As anticipated, the Reserve Bank of India (RBI) maintained its key policy rates and liquidity stance unchanged during the June 2024 monetary policy review. The RBI revised its annual GDP growth estimate upward for the current year while keeping the retail inflation forecast steady.

He also added that several indications from the governor's speech suggest that the RBI is unlikely to commence rate cuts soon. The upward revision in growth, the expectation of a non-linear disinflationary process, and a clear signal that the RBI will not mirror the Federal Reserve's anticipated monetary policy easing, imply that a rate cut in 2024 is improbable.

Gold is a safe-haven asset for hedging returns during inflationary pressures. That being said, how will policy repo rate impact gold prices?

The interest rate and gold share an inverse relation. When the central banks like The Fed raise the interest rates they increase the opportunity cost of holding valuable assets like gold. Simply because the precious metals do not generate yield and in an environment with rising interest rates alternative high yielding investments become more attractive.

Conversely, when interest rates remain unchanged or lower, the value of gold as a safe haven metal increases against the rising economic uncertainty, inflationary pressure or maybe the geopolitical risks.

However, some market analysts argue that there's little evidence that gold is consistently weakened by federal funds rate hikes or Treasury yields. Despite some negative correlation in the 2000s, there are numerous instances of gold and interest rates rising together, making it inaccurate to claim that high interest rates cause gold prices to fall.

Ultimately, the relationship between gold prices and interest rates is uncertain and unstable, as gold is traded on a global market influenced by forces far beyond the reach of the Federal Reserve.

According to data provided by Curvo, So far in 2024 (YTD), the Gold spot price index has returned an average 15.32%.

As per Bullion By Post, gold and interest rates traditionally have a negative correlation in the relationship between the two. It is not guaranteed but usually the gold price goes up when interest rates go down, and down when rates go up. This is because rising interest rates make stocks, government bonds and other investments more attractive to investors. Lower interest rates make these alternative assets less appealing; driving investors towards gold, and increasing demand and the price accordingly. Gold is seen as a store of wealth for times of financial difficulty for this reason.

On Wednesday, the Bank of Canada also made an anticipated decision by reducing its key policy rate by 25 basis points to 4.75%. This move marks the first cut in four years,and was in line with the expectations. The Bank also indicated that further easing could be expected if inflation continued to decline.

The ECB changed its rate to 3.75%, from an all time high of 4% after nearly 5 years. The Bank of England's policymakers are scheduled to meet on June 20, but it's uncertain whether the governing board will cut the rate from 5.25%. Investors are awaiting any news and announcement about the rate cuts by the Fed after this.

According to the IMF, Global headline inflation is expected to decline to 5.8 percent in 2024 and further to 4.4 percent in 2025, with the 2025 forecast revised downward. Between the third quarters of 2020 and 2022, median global inflation soared from 1.9 percent to 8.8 percent. This contrasts with the experience of the Great Recession, when median global inflation plummeted from 9.9 percent in the third quarter of 2008 to 1.7 percent in the third quarter of 2009.