The average spread in the gold prices between the Mumbai and London markets narrowed further to 6.5 per cent in the first quarter of 1998 from 19.9 per cent during the corresponding period of the previous year.

In the first quarter of 1998-99, the monthly average gold prices in the domestic and international markets registered a sharp fall compared with the rates in the corresponding period of the previous year.

According to the World Gold Council, against an increase of 9 per cent in the world demand for gold, the demand in India increased by 45 per cent to a record level of 737 tonnes during 1997 from 507 tonnes in 1996, reflecting an increased response to the decline in prices.

The substantial decline in the price of goldin the international market was a result of a large-scale sale of gold by European central banks in order to attain the fiscal deficit target envisaged in the Maastricht treaty.

The changing perception in the market regarding the utility of gold as a hedge against inflation in the presence of alternative high-return investment avenues has also resulted in a sharp decline in the international gold prices.

An increased domestic demand for gold in 1997-98 was sufficiently met by excessive supply facilitated by the Indian government as it allowed non-resident Indians to import 10 kg of gold against five kg earlier every six months with effect from January 1, 1997. During this period, the RBI also allowed 12 authorised agencies to import gold under the Open General Licence (OGL) without any limit on quantity and sell it in the local market against rupees after payment of a five per cent duty. Another factor which led to an increase in gold supply was the fall in the international gold prices.

During thefirst quarter of 1998, in the domestic market, the monthly average price of gold increased by 5.5 per cent over its March level to Rs 4,215.4 per 10 grams in June 1998. Correspondingly, in the London market, it declined by 1.2 per cent to $292.2 per troy ounce owing to the rupee's depreciation against the dollar.

The average domestic price of gold in the Mumbai market declined by 14.3 per cent to Rs 4,347 per 10 gms in 1997-98 from Rs 5071 per 10 gms in the previous year.

The monthly average price of silver in the Mumbai market fell to Rs 6,332 per kg in July 1997 from Rs 6,969 per kg in April 1997. However, the average price of silver in the Mumbai market increased by 2.6 per cent to Rs 7,352 per kg in 1997-98 from Rs 7,165 per kg in 1996-97.