Falling gold prices is “net positive” for the Indian economy and if the precious metal settles at the current levels, then the current account deficit (CAD) is likely to be 3.9 per cent in 2013-14.

According to Bank of America Merrill Lynch research report, declining gold prices would narrow CAD so much so that a fall of $100 per ounce would compress the CAD level by about $3 billion.

“Falling gold prices is net positive for India,” BofA ML Chief Economist India, Indranil Sengupta, said in the report.

“If gold settles at current levels, our FY 2014 current account deficit forecast will come off to 3.9 per cent of GDP from 4.3 per cent of GDP,” he added.

Current account deficit

CAD represents the difference between inflows and outflows of foreign currency. CAD had touched a historic high of 6.7 per cent of GDP in the quarter ended December.

Earlier last week, gold had suffered the biggest loss of Rs 3,250 in four sessions. Gold is trading at Rs 26,350 per 10 grams, its lowest level since August 17, 2011.

Rural gold demand

“Gold investment demand is unlikely to revive in a hurry after the recent crash. With rural incomes slowing, we do not expect rural gold demand, another major source of rural demand, to rise substantially this year either,” it added.

Bank gold loans

The report further noted that given the spike in gold loans in the recent years, it is only logical to expect stricter guidelines on bank gold loans at the RBI monetary policy review on May 3 (which will address monetary as well as banking developments).

Financial Services Secretary, Rajiv Takru, has said that government banks would review the loans backed by gold and call for more collateral if gold prices fall further.

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