Relationship among gold price, exchange rate and current account deficit - a study in Indian context

Abstract

This study attempts to investigate the causal relationship between gold price, exchange rate and current account deficit (CAD) on the basis of time series data for 14 years from 2002 to 2016. In recent days gold has attracted the attention of economists, researchers, policy-makers and common man. There is a general view that recent current account deficit (CAD) is attributed to mainly gold import only as crude oil price has fallen considerably. It is with this backdrop, this article tries to unveil any dynamic, if exist, between gold price and CAD applying augmented Dickey-Fuller (ADF) test and Phillips-Perron (PP) Test which are used to test the stationarity of time series data and block exogeneity Wald Test to establish the causality relationship among them. On the basis of quarterly observation for the aforesaid period, it has been found that these three variables are stationary of order one and the study further found the existence of bi-directional Granger causality between gold price and CAD, which is running from gold price to CAD and vice-versa. The findings of the study have significant implication for India's economic policy and facilitate the Government to make strategies to reduce the CAD.