Gold Fall - Is it good or bad?

The fall in gold prices will help bring 

down India's current account deficit

The metal tumbled after news that the Cyprus government planned to sell some of its gold reserves to raise e400 million to fund its bailout. Fears of further central bank gold sales in the eurozone following the Cyprus proposal sent the metal tumbling on the London Bullion Market to a 26-month low of $1,321.50 an ounce on April 15 from $1,565 on April 11. 

Between them, Portugal, Ireland, Italy, Greece and Spain hold more than 3,230 tonnes of gold worth nearly e125 billion. 

The fall in gold prices could not have come at a better time for India. Lower crude oil and gold prices will help bring down the current account deficit (CAD) - excess of imports over exports plus remittances - which will improve the country's investment rating. 

A wide CAD is a sign of economic weakness as it means the country is a large debtor.

Don’t rejoice just yet. Falling gold prices may not reduce CAD

The HSBC analysis shows that while a decline in gold prices would be counterbalanced by an increase in demand for the yellow metal, other factors are likely to help lower the large gold import bill when measured against gross domestic product (GDP). The consumption demand for gold is likely to decelerate due to somewhat slower income growth on the back of deceleration in growth and the gradual easing in inflation pressures. This apart, improving real returns on bank deposits as inflation eases should also help dampen demand for gold.

Gold prices have fallen over 10 percent since last year, lifting sentiment in India, which is the world’s largest gold importer. Policymakers have, for long, been concerned about the hefty gold imports and the concomitant effect on the CAD. The CA deficit has been very high, at 5.1 percent of GDP in 2012, with gold imports alone accounting for 2.9 percent of GDP.