Wednesday, 27 April 2016


CURRENT PERSPECTIVES IN FIANCE-Edited by Dr.Indrani Saha,Dr.Kajal Gandhi and Dr.Ram Prahlad Choudhury,Rohini Nandan,19/2,Radhanath Mallick Lane,Kolkata-700012,pp  vi+352,HB,Rs 450/-,2016)

The book titled as “ CURRENT PERSPECTIVES IN FINANCE” was released on 18th April,2016 in Shri Shikshayatan  College,Kolkata.It contains 28 articles which were presented in the seminar on 11th September,2015 organised by  the above college.This book is edited by Dr.Indrani Saha (Shri Shikshayatan  College),Dr.Kajal Gandhi(Shri Shikshayatan  College) and Dr.Ram Prahlad Chowdhury(Calcutta University).
In the article , “Issues of finance ,entrepreneurship and growth with reference to Indian Financial System”,  Dr.P.K.Haldar (Tripura University) initiated to focus Indian financial system and its process of reforms which were also emphasized by the new Government under the programme of Start up India,Stand up India,Make in India,Digital India and so on.Make in India is consistent with financial sector reform in this context of globalization and institutional reforms.It requires good management of risk at home and foreign markets through financial integration.New Government introduced Companies Act 2013 to encourage hi-tech business,entrepreneurial venture and start ups in pursuit to create new business assets where SEBI also made reform in listing norms for start up companies,entrepreneurships to accelerate economic growth. 
In the article, “ Is there any relation between gold price and inflation in India?”,Dr.Debesh Bhowmik(International Institute for Development Studies,Kolkata) endeavours to relate gold price with inflation in India during 1960-2014 using cointegration and VAR model. The paper showed that the gold price is cointegrated with the percentage change in consumer price index and whole sale price index in the order  of (1,1) which is tested by Johansen Cointegration  Methodology. Trace statistic and Max-Eigen Statistic are found significant having three cointegrating equations. Granger causality test assured that there is two-way causality between CPI and WPI and gold price and CPI but there is one way causality between gold price and WPI respectively.VAR model becomes unstable because impulse response functions diverge from zero,and some of AR polynomial roots  lie outside unit root circle .All variables are related with previous period.Residuals are normally distributed as shown by Doornik-Hansen test.VEC model suggests that the error correction terms are adjusting speedily which are  significant yet VEC model is unstable since impulse response functions diverge from zero although roots lie inside the unit circle .Doornik-Hansen VEC Residual Normality test assures that residuals are multivariate normal.Although , gold price is significantly positively related with whole sale price index  only but the relation between CPI and gold price is direct and insignificant.
Dr Avijit Sinha and Debabrata Jana (Vidyasagar University) in their article “A study into the competition trend among the private commercial banks in India” studied the nature of competition among private banks with structural and non structural measure where they used concentration ratios like CR3,CR5 and Herfindahl-Hirsman index, h statistic using Panzar and Rosse model where labour,capital and loanable fund were taken for reaction on profitability.For H statistic the test of white heteroskedasticity and Ramsey RESET were done and did not find any heteroskedasticity and model inadequacy problems.A few selected banks dominate the major share in the market as reported by concentration ratio.The non structural measure also shows the presence of monopolistic competition in the private sector banks.
Snehamay Bhattacharjya (Calcutta University) and Sutapa Banerjee(Sri Shikshayatan College) in their paper “Dividend policy-An Unsolved puzzle” identified all possible determinants of dividend policy.It considered dividend policies like liquidity,profitability,liverages,size,risk,investor base,growth opportunities,signaling,insider ownership and dividend history.Liquidity and profitability bears mostly a positive relation with dividend policy,whereas,size,risk,and growth opportunities mostly bear a negative relationship with dividend policy.A few studies have shown concentration in the nature of the relationship between a few determinants and dividend policy for which further studies are required.  
In the article “Money market volatility in India-An empirical analysis”,Madan Mohan Jana and Nilanjana Biswas(Sushil Kar College) analysed the interdependence between the stock market and money market and investigated the movement pattern of money market instruments yield rate and NSE nifty index in India and examined how the money market instruments impulses upon NSE nifty index in India.
Krishna Dayal Pandey and Dr.Tarak Nath Sahu(Vidyasagar University) in their paper titled “Does capital structure affect firm performance and value-A study on BSE listed manufacturing firms” found a negative effect of capital structure measured by debt equity ratio on firm performance and value introducing return on assets and return on capital employed to represent performance and also introduced Tobin’s Q as a measure of value.They suggested that capital structure should be highly considered as one of the sensitive decision areas and the magnitude of leverage should be maintain at a possibly minimum level.
Samyabrata Das and Atanu Ghosh (New Alipur College) in their article “ Are Pharma funds good bets?:A study in the Indian context” studied three pharma funds,namely,Reliance Farma Funds,SBI Farma fund and UTI pharma and health care fund based on secondary data using parameters to measure risk,return, aggressiveness of funds and extent of diversification.The paper concludes that the funds are heavily titled towards equity,exposure to a single stock is more than 12%,SBI pharma fund has performed better than the benchmark index on most occasion ,SBI pharma fund has remained the most aggressive fund during all the periods and the funds are adequately diversified within the sectors.Only experienced investors having high risk tolerance and familiarity with the nifty-gritty of the concerned sector of the economy can take a limited exposure to such funds in order to add a little bit of aggression to their portfolio.
Prof.Snehamay Bhattacherjya(Calcutta University) and Ujjayani Saha Gupta(Shri Shikshayatan College) in the article titled “ A study on corporate social responsibility in Indian cement industry:A case study on select few major cement companies in India”,showed CSR activities of ACC cement,ULTRATECH cement and AMBHUJA cement during 2010-2015 where they are committing to its stakeholders to conduct  business in an economically,socially and environmentally sustainable manner that transparent and ethical.In all companies the CSR impact is strongest with welfare programme.The CSR spending of each of the companies are nearly 2% of the 3 years average net profit after tax as mentioned in the new Companies Act 2013 except for Ambuja which has contributed to nearly 3% of their average net profit after tax.The CSR activities are done in areas where the companies benefits to a lager extent especially in health and family welfare program,community infrastructure development project,contribution in religious and social program,promotion of cultural heritage,national resource management,women empowerment program,educational program,community welfare activities and agricultural development.
Dr.Kajal Gandhi (Shri Shikshayatan College) in his “Impact of economic urbanization on Indian stock market development-A review of literature” said that the long practiced state dominated economic development model has lost much of its edge  and focus has been shifted sharply towards more market determined strategy of development.After  the economic liberalization process started in 1990s  Indian stock market  has produced an average   nominal return of about 17% annually in terms of capital appreciation and now Indian capital market is 4th largest in Asia and 10th largest in the world in terms of market capitalization.
 In the article, “Evaluating the effectiveness of NREGA programme on rural people :An empirical study on panitor grampanchayet of Basirhat,North 24 Parganas,WestBengal”,Dipayan Singha (Sri Chaintanya Mahavidyalaya) and Dr.Amit Majumder(Bijoy Krishna Girls’ College) found that NREGA is satisfactory in Basirhat during the study period of 2012-13-2013-14 although they found decline in unemployment,decline in flood affected areas,increase in ground water level,increase in financial activity of rural households,increase in vegetation covered areas and incrase in financial activities of women.
Akraprava Chakraborty(Umesh Chandra College) in his article “The effects of interest rate changes by Researve Bank of India though their monetary policies” attempted to find out the effects of changing interest rate on banks and other financial and industrial sectors,traders and consumers and even he showed the reaction of commercial banks and capital markets.He tries to synchronise it with monetary policy and fiscal policy of the country.
Asim Kumar Roy (Dr.Kanailal Bhattacharjya College) and Dr.Samarpita Seth(New Alipore College) in their article , “ A comparative study of UTI mastershare funds and UTI equity funds” ,showed that during 2008-2015,the funds have generated satisfactory risk adjusted return,both the funds are defensive in nature,managers of both funds are successful in reducing unsystematic risk,fund managers of both the funds are successful in selecting quality stocks,both the funds exhibit very good performance so far as SIP return is concerned.
The study of Arup Kumar Sarkar  and Tarak Nath Sahu (Vidyasagar University) in “Individual investor behavior in stock market in India” revealed that people  of ages between 28 years to 37 years invest in stock market in India whose income is above 100000/ to achieve long run profit.There is heuristics,prospects and market bias on the Indian individual’s investor’s behavior in stock market in India where herding dimension is not strong.The age of individual investor has an effect on individual investor behavior including marital status.Occupation ,experience and income also matter.There is relation between risk attitude and individual investor behavior.Future research may cover relation of demographic factors and risk attitude and also consider institutional investors.    
Soheli Ghose (St.Xavier’s College)in the article “ strategies that help poverty reduction through inclusive growth” highlighted some strategies of inclusive growth like expenditure on health and education,improved infrastructure and improved employment and growth in agriculture might be beneficial to reduce in poverty ratio in India.
Souvik Mukherjee(Jadavpur University) and Tanusree Das(Shri Shikshayatan College) in their paper on “ The financial and economic crisis in Greece-A strategic analysis” concluded that there is inverted U kind of relation between levels of public debt and growth rate of GDP of Greece during 2009-2015.The levels of public debt,the rate of unemployment and the current account deficit are inversely affecting the growth rate of GDP which is a matter of serious concern.
Sreemoyee Guha Roy(St.Xavier’s College) in the paper “Inclusion through micro insurance: A case study of Malda District,West Bengal” evaluated the performance of microinsurance product in the rural Malda and found high vulnerability .
Dr.Kushal De (Dhruba Chand Halder College) in his paper “A review of the financial crisis of 2008 and its impact on India” attempted to review the global financial crisis and its impact on Indian economy based on secondary sources of information.He showed impacts on industry,trade,exchange rate,employment, poverty and cited examples of monetary and fiscal policy of government and RBI although high impact was not felt in manufacturing,services,transport,hotels etc.
In the “Income tax Act ,1961 and the problem of black money in real estate transactions”,Dr.Ram Prahlad Choudhury (University of Calcutta) and Dr.Surjya Narayan Ray(Dinhata College) analysed the Finance Act 2013 including sections 50C,43CA,56(2) and 194 1A in prevention of black money.They proposed to amend more on those acts  to resolve the ambiguities,confusions and controversies relating to implementation.
In “Impact of E-Banking on traditional services”,Asit Kumar Shit (Charu Chandra College) concluded that E-Banking is a borderless entity permitting anytime ,anywhere and anyhow banking which facilitates us  with all the functions and many advantages as compared to traditional banking services.It showed that opportunity cost of lost of banks customers will reduce to use of E-Banking and also indicate non-existing of enough knowledge and trust have led to decrease in using E-Banking  in the world  and education can increase using of E-Banking service among the banks were taken customers in the world.
Fatema Mandlaywala(Shri Shikshayatan College) and Pingla Roy Chowdhury(Shri Shikshayatan College) tried to assess the level of financial literacy among individuals in Kolkata in their paper “Financial literacy:Relevance in modern day investment -Kolkata based case study” and concluded that 39.5% individuals irrespective of gender are financially literate,male literacy is higher by 13%,age group of 40 are more financially literate as compared to 30s or 50s and above.A high percentage of people  rely on investing their savings in banks as fixed deposits to avoid any risk.
Parna Banerjee(Scottish Church College) in the paper “Effectiveness of investors’ awareness programmes among potential investors-A case study”,concludes that prices of almost all sample gold ETFs and CNX Nifty do not reflect the change in the market index Nifty except that of Kotak Gold.On the other hand,from the regression analysis where 11 sample as independent variables with CNX Nifty as the dependent  and GOLDSHARE,HDFCMFGETF,IGOLD,KOTAKGOLD are good predictors of market  return.
Sourav Dutta Mustafi(Maharani Kasheswari College) and Sudipta Ghosh (Maharani Kashaswari College) in their article “ Progress and prospect of SHG (self help groups) in light of  microfinance:A regionwise analysis in Indian context” found that although SHG movement has been empowered in recent years but region wise disparity should taken into account in order to make SHG more fruitful,so that  the benefits of SHG can be reached to the farther corner of India.
Pranjal Kumar Chakraborty(Scottish Church College) in his paper “Ethical issues in informal microfinance institutions-A study of Murshidabad District,West Bengal” explained that the expansion of commercialized MFIs in Murshidabad gradually created a stiff competition among the MFIs,thus some of the MFIs shifted from social objectives to complete profit maximization likewise a conventional private money lenders.Local informal MFIs ,Mahajans believe that both of the social and financial objectives cannot attained at the same time,but only through paradigm shift towards profitability and sustainability practices .On the contrary microfinance is effective and flexible strategies in fighting global poverty.
Sebanti Show and Nancy Jaiswal (Shri Shikshayatan College) in their paper on “Mutual Funds:As a resource mobiliser in Indian Economy” analysed the relationship between AUM mobilized by mutual fund companies and GDP growth rate of India.To find out correlation coefficient Kendall’s tau b and Spearman’s rho  correlation was applied during 1999-2000-2013-14.Kendall’s tau b correlation coefficient was found 0.886 which is significant at 1% confidence level and rho was found as 0.971 which indicates that the relation between GDP growth rate and AUM  mobilized by mutual fund companies have a strong positive relation.
Sunita Ghatak (T.H.K Jain College) in the paper “The new era of merger regime in the light of companies Act2013---without juridical prudence—A welcome move” showed true facts of rationality of restructuring concentrating  on the key issues and commercial implications of the regulatory norms of mergers and acquisitions as per the new act.The 2013 Act envisages a paradigm shift in the process of compromise/arrangements.It envisages that all the powers and functions of the company law board,company court,BIFR under Sick Industrial Companies Act will henceforth be exercised by the NCLT.Establishment of a single forum which is dedicated to corporate matters is a welcome move and removes the problem of multiple regulators.
Debayan Sengupta (Shyama Prasad College) in the article on “Conceptual study on financial implications of stress” investigated on the nature and extent of stress  among individuals in different organizations highlighting the causes of stress,the financial implications of stress and the need to identify the stress and tackle  them accordingly.He suggests that organization should identify the different work  environment contributors such that a healthy work culture can be developed within and its employees can feel more comfortable with their job responsibility.The eeficiency and productivity would improve substantially and the organization will reach to its goal smoothly.
Suvarun Goswami (Rishi Bankim Chandra College) in his article on “Corporate social responsibility in eastern coal fields limited:A study” analysed the conceptual perspectives of CSR of a lot of confusions exist as to the real meaning and essence of the term along with a thorough literature review.His findings on ECL showed that 249 workers,36 trade unions,23 management personnel gave positive views on CSR,improving standard of living of workers and their activities are adequate and even benefitted by the neighbours.He suggested PPP model in CSR who must follow voluntary guidelines of 2009 G.O.I.,,submit audit and report,permits NGOs,and concerned ministry should emphasis on poverty alleviation,gender equality,promote education and health,ensure environment sustainability and social welfare.  

Is There any Relation between Gold Price and Inflation in India?
Dr.Debesh Bhowmik (Ex.Principal,and Associated with International Institute for Development Studies,Kolkata)
Key words-Gold price, Inflation,Cointegration,VAR,VECM
This paper endeavours to relate gold price with inflation in India during 1960-2014 using cointegration and VAR model. The paper showed that the gold price is cointegrated with the percentage change in consumer price index and whole sale price index in the order  of (1,1) which is tested by Johansen Cointegration  Methodology. Trace statistic and Max-Eigen Statistic are found significant having three cointegrating equations. Granger causality test assured that there is two-way causality between CPI and WPI and gold price and CPI but there is one way causality between gold price and WPI respectively.VAR model becomes unstable because impulse response functions diverge from zero,and some of AR polynomial roots  lie outside unit root circle .All variables are related with previous period.Residuals are normally distributed as shown by Dooknik-Hansen test.VEC model suggests that the error correction terms are adjusting speedily which are  significant yet VEC model is unstable since impulse response functions diverge from zero although roots lie inside the unit circle .Doornik-Hansen VEC Residual Normality test assures that residuals are multivariate normal.Although , gold price is significantly positively related with whole sale price index  only but the relation between CPI and gold price is direct and insignificant.

We are mostly aware of the fact that the Indian inflation rate depends on money supply, interest rate, oil prices, asset prices, growth rate, exchange rate, and so on but whether gold prices have any influences on CPI or on WPI is a matter of wide research and studies which are not fully done. Yet a few studies in India endeavour to analyse the said relation. Even, how much gold return hedges against inflation needs to be researched in India. Since the gold dollar convertibility collapsed and the International Monetary System is now a non-system, then how much gold price influence in the international payment mechanism is a subject of analysis via exchange rate mechanism which is either in fixed or in float.
Therefore, I have studied that gold price in India is an influential factor to change inflation rate whether it is measured by percentage change in consumer price index or by whole sale price index. This study covers the period from 1960 to 2014.

II.Earlier Studies
Soni and Parashar(2015) analyze the casual relationship between Gold demand and Inflation using  the monthly data from 2002 to 2012 .The results of Augmented Dickey- Fuller test conclude that the series are stationary and integrated of order one. There is a positive correlation between stock returns and gold price from 2002 to 2007 but due to economic crisis in USA in 2008 and 2011 this correlation seems to be fading and it was establish by using correlation and Johansen's co-integration test that there is no relation between gold prices and stock returns i.e. Sensex return in the long run period. The results of Granger causality test reveals that returns of Sensex index does not lead to increase in gold price and rise in gold price does not lead to increase in Sensex. Overall, we can conclude that gold is a significant predictor of inflation for many developed inflation-targeting countries. Worthington, Pahlavani (2006), explore the short-run as well as long-run relationships between the gold price and the general price level to investigate the hedge inflation effectiveness of gold.  The idea that gold as an inflation hedge is not new, which is virtually found with related papers like “gold is an asset of “safe havens” against the debasement of paper money” , “gold is leading indicators of inflation” or “gold is an inflation hedge” and so on. Mahdavi, Zhou (1997) test the performance of gold and commodity prices as leading indicators of inflation with cointegration and vector error-correction model (VECM) over 1958-1994. Their findings show that the stability of the gold price signalling inflation may vary depending on the time span being examined. Ranson, Wainright (2005) conclude that the price of gold is the superior predictor of the next year inflation. Capie et al. (2005) apply Exponential generalized autoregressive conditional heteroskedasticity (EGARCH) technique to investigate the exchange rate hedge of gold price by using weekly data over the period 1971- 2004. They find that the gold returns can be a hedge against U.S. dollar depreciation and that there is a negative relationship between gold price and sterling-dollar and yen-dollar exchange rates but the strength of this relationship varies over time.  Laurent (1994), Harmston (1998), Ghosh et al. (2004) who study the relationship between the gold price and wholesale price find that gold acts effectively as a long-run inflation hedge in U.S., Britain, France, Germany, and Japan. Using monthly gold price data. Wang and Nguyen(2013) investigates the rigidity of gold price adjustment and the inflation-hedging ability of gold in U.S. and Japan applying the linear and non-linear cointegration test and the nonlinear threshold regression model. Based on thirty-six years of gold price and Consumer Price Index (CPI) data, it is found in the short run that gold return is unable to hedge against inflation in both countries when gold price adjustment is in the low-momentum regime. During high-momentum regime, the gold return is unable to fully hedge against inflation in Japan because of the rigid adjustment between gold price and CPI; however, the gold return fully hedges against inflation in U.S. where the gold price adjustment is not rigid. These findings also explain why gold in U.S. effectively hedges against inflation and gold in Japan just partially hedges against inflation in the long-run. Levin and Wright (2006) examine the factors that contribute to the fluctuation of gold price with cointegration and VECM techniques over 1976- 2005. Their findings are triple. First, there is a long-run relationship between the price of gold and U.S. price level. Second, there is a positive relationship between changes in the gold price and changes in U.S. inflation, U.S. inflation volatility, and credit risk, while there is a negative relationship between gold price movements and changes in the trade weighted U.S. dollar exchange rate and the gold lease rate. Third, in the major gold consuming countries such as Turkey, India, Indonesia, Saudi Arabia, and China gold acts effectively as a long-term hedge against inflation.  The findings of prior studies that prove the effective inflation hedge of gold are almost consistent. Ghosh et al. (2004) investigate the contradiction between short-run and long-run movements in the gold price and find that the gold price rises over time at the general rate of inflation and hence is an effective hedge against inflation under a set of conditions during 1976-1999. Using data for 14 countries over the 1994 to 2005 period, Tkacz(2007) assess the leading indicator properties of gold at horizons ranging from 6 to 24 months. He finds that gold contains significant information for future inflation for several countries, especially for those that have adopted formal inflation targets. This finding may arise from the manner in which inflation expectations are formed in these countries, which may result in more rapidly mean-reverting inflation rates. Compared to other inflation indicators for Canada, gold remains statistically significant when combined with variables such as the output gap or the growth rate of a broad monetary aggregate. Zafar and Javid(2015) analysed the nature of the relationship of expected and actual inflation with gold return and its cost of carrying i.e. the interest rate. By employing an autoregressive moving average (ARMA) with generalised autoregressive conditional heteroscedasticity (GARCH) models, the time varying relationship between the variables is studied. The data sample used in the study ranges from January, 2001 to December, 2013. The results support gold as an effective hedge against inflation in Pakistan; since, the returns on gold investment exceeds its cost of carrying with the view of changing expected inflation. Another important implication of the study is that gold can also perform a considerable role with the prospect of Islamic financing because it is proven to be more advantageous as compared to its alternative interest bearing investments. Kumar and Malik(2015) examined that the inflation rate and gold prices are positively correlated with each other. When there is increasing trend of inflation in the economy the gold prices increase too. This satisfies the gold is inflation hedge in times of high inflation trend taking period of six years and six months commencing from April 2009 to December 2014 . Gold prices and repo rates are negatively correlated. It can be explained as the repo rate increases the gold prices decreases. Because increase in repo rate reduces the flow of money in the economy and purchasing power of individuals decreases. Using data for four major economies, namely the USA, the UK, the Euro Area, and Japan, Beckmann and Crudaj (2012) allow for nonlinearity and discriminate between long-run and time-varying short-run dynamics. Thus, they conduct a Markov-switching vector error correction model (MS-VECM) approach for a sample period ranging from January 1970 to December 2011. They found threefold: First, gold is partially able to hedge future inflation in the long-run and this ability is stronger for the USA and the UK compared to Japan and the Euro Area. In addition, the adjustment of the general price level is characterized by regime-dependence, implying that the usefulness of gold as an inflation hedge for investors crucially depends on the time horizon. Finally, one regime approximately accounts for times of turbulences while the other roughly corresponds to ’normal times’.
Worthington and Pahlavani(2006)studied that the inflation hedging quality of gold depends on the presence of a stable long-term relationship between the price of gold and the rate of inflation. Because of significant structural changes in both the gold market and consumer prices, this analysis uses the Zivot and Andrews (1992) test procedure to endogenously determine the most significant structural breaks impacting upon this relationship. The results suggest the most significant structural breaks in both markets correspond to the gold market moving to purely open market operations and the acceleration of inflation in the 1970s. A modified cointegration method incorporating these breaks indicates that a strong cointegrating relationship exists between gold and inflation suggesting that gold is a useful inflation hedge in the post-war and post1970s period.  Narayan, Narayan, & Zheng (2008) concluded that the investors can use the gold market as a hedge against the coming inflation and oil markets could be used to predict the prices of the gold market. Büyüksalvarcı (2010) confirms the findings by showing the effects of 7 economic variables (Gold prices, Oil prices, Interest rate, CPI, foreign exchange rate, Money supply and Industrial production index) on the Turkish stock exchange. In his study he also mentioned that gold is now an alternative tool of investment for Turkish investors. The increase in the prices of gold attract the investors, the investors tends to invest in gold rather than in stocks, which cause the stock prices fall. Therefore the relationship between gold prices and stock returns are negative, increase in one cause decrease in other and vice versa. Adibe and Fei(2009) consider safe haven, inflation hedge, and dollar destruction hypotheses. The safe haven hypothesis claims that gold returns will increase as fear increases. They use three alternative measures of fear: volatility in the S&P 500 Index, the consumer expectation in Michigan Survey of Consumers and Moody’s Baa and Aaa bond premium. Gold returns do not have significant correlation with any of these measures. Related to safe haven hypothesis is the idea of gold being a negative-beta asset. They tested this hypothesis with S&P 500 returns, U.S. Industrial Production and Kilian’s Dry Cargo Index and rejected it in favor of the zero-beta asset alternative. The inflation hedge hypothesis postulates the negative correlation between expected inflation and the return of gold. They find a very significant relationship between the price movement of gold, real interest rates and the exchange rate, suggesting a close relationship between gold and the value of U.S. dollar. The multiple linear regressions verify these findings. The decomposition of gold price under a semi-structural VAR model shows that aggregate demand shocks, monetary demand shocks, and precautionary demand shocks have only a modest influence on the price of gold. The unspecified structural shock underlying exchange rates is the driving force of the gold price. The central message of the paper is that gold’s relationships with fear and inflation are not what most people believe. We should not regard gold as a mysterious asset that is immune to fluctuations and behaves uniquely on the market. Rather, we should regard it as another currency, whose value is a reflection of the value of the U.S. dollar and U.S. monetary policy.
III.Methodology and Data
To find out the relation between gold price and inflation rate ,we used Johansen (1988) model for cointegration and Johansen (1991,1996) model for VAR Analysis. We have done Granger Causality test by using Granger Model(1969).Hansen-Doornik( 1994 ) model is used for Normality test. Data have been collected from the International Financial Statistics of IMF ,World Bank, Reserve Bank of India, and inflationindia.com for the year from 1960 to 2014.
IV.Econometric models
One percent increase in gold price per year leads to 0.1398% increase in inflation rate( measured by change of CPI) per year in India during 1960-2014 which is insignificant .The double log regression model is given below.In Fig-1,the estimated trend line is shown by green line.
               (0.886)   (1.366)
R2=0.034  ,F=1.867  ,DW=1.896, where x1= percentage change of CPI, y=gold price (Rupees thousand per 10 grams)
….. V.Some Policy Recommendations
If a nation fixes the target rate of inflation then gold price has its impact too and gold market is considered  as a hedge against the inflation expectation. Gold price has positive relation with inflation and inflation expectation. Therefore, Gold indexed WPI related bond sale in times of high inflation is effective OMO along with other monetary policy which is also useful when inflation expectation is very high. Gold convertible bonds is another effective tool in curbing gold price induced inflation.The control of gold price hike to the Government is the primary tool when ceremonial demand is too high. Gold flows should be more protective formulating good articles subject to FEMA.
This paper concludes that percentage change in CPI (inflation rate) and WPI are cointegrated with gold price in the order of (1,1) and Granger Causality test(1969) confirmed that CPI and WPI has bi-directional causality,gold price and CPI has also bi-directional causality but gold price and WPI has uni-directional causality .VAR model states that percentage change in CPI,WPI and gold price are related with their previous period and gold price is also related with previous period’s WPI significantly.VAR model is unstable having diverging impulse response functions including autocorrelation but all roots lie inside the unit circle with residuals are multivariate normal.The VEC model showed the significant speedy error correction process although the VEC model is unstable. The estimated VECM states that the first difference gold price is significantly related with the change of Inflation rate (CPI) and the change of WPI of the previous periods and even related with the change of gold price of the previous period significantly.All roots lie inside the unit circle and having autocorrelation problems but residuals are multivariate normal and diverging impulse response functions. Double log regression showed gold price is significantly positively related with WPI and insignificantly related with percentage change in CPI which is negatively related insignificantly in multiple double log regression analysis during 1960-2014 in India.
---see book page 22-39

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