Gold Prices and Macroeconomic Fundamentals in India: Exchange Rate Dominance, Inflation Hedging, and Long-Run Cointegration Evidence from ARDL Bounds Testing (2007–2022)

Abstract

This study empirically investigates the long-run and short-run determinants of domestic gold prices in India using monthly data spanning January 2007 to December 2022 (192 observations). Employing the Autoregressive Distributed Lag (ARDL) bounds testing framework of Pesaran, Shin, and Smith (2001), we establish a stable cointegrating relationship among gold prices and five macroeconomic fundamentals: consumer price inflation, the INR/USD exchange rate, the RBI repo rate, Brent crude oil prices, and the Nifty 50 equity index. The exchange rate emerges as the dominant driver with a super-unitary long-run elasticity of 1.23, reflecting India's structural import-dependence for gold. Inflation exhibits a near-unitary hedging elasticity of 0.87, confirming gold's role as a long-run inflation hedge. The repo rate exerts a significant negative effect (−0.34), validating opportunity cost theory, while crude oil (0.41) transmits positively through inflationary and current-account channels. The Nifty 50 yields a negative coefficient (−0.19), consistent with safe-haven substitution. The error correction term of −0.288 indicates that approximately 28.8% of short-run deviations from long-run equilibrium are corrected each month. Granger causality tests confirm unidirectional causality from all macroeconomic variables to gold prices, and Forecast Error Variance Decomposition attributes 61.2% of gold price forecast variance to macroeconomic fundamentals at the 24-month horizon. Comprehensive diagnostic tests confirm model adequacy. The findings carry significant implications for monetary policy transmission, portfolio diversification, and India's import management strategy.