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
JEL-C32,E41,E44
ABSTRACT
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.
I.Introduction
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.
Log(x1)=0.6871+0.139821log(y)
(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.
VI.Conclusion
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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