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Commodities

Light at the end of the tunnel as Diwali spurs gold demand

For many Indians, the Dhanteras festival is an auspicious time to buy gold. (Photo by Yuji Kuronuma)

NEW DELHI -- India, the world's second biggest consumer of gold after China, has started seeing a rise in demand for the precious metal in the run up to Diwali, the country's biggest festival on Oct. 30, after a tough year for the sector.

From January to June, jewelry demand in India struggled due to a sharp jump in the price of gold to over 30,000 rupees ($448.5) per 10 grams. After two years of below average monsoon rains, weaker spending in rural areas, which account for more than half of demand, has also taken its toll, according to the World Gold Council.

Government regulations, including the introduction of an additional 1% excise duty and a requirement that purchases of over 200,000 rupees have a permanent account number (PAN), added to the woes of Indian jewelers, who effectively shut down the market with a 45-day nationwide strike lasting until mid-April. A PAN card issued by the tax department enables authorities to track monetary transactions with a view to curbing flows of illicit money.

Despite demand remaining weak, the WGC said about 44 tons of smuggled gold managed to enter the country during the April-June quarter as the trade attempts to find ways around the legislation. "This is in line with our 2016 full-year forecast range of 140-160 tons, up from around 120 tons last year."

Gold symbolizes luck for many in India and is a common wedding-day gift. Gold ornaments are also often kept for a rainy day. According to official estimates, India imports between 800 and 1,000 tons each year. Demand is strongest during the August to October festival season followed November to May, when many weddings take place.

India is thought to have more than 20,000 tons of gold stored away in households earning no interest and the government has pressed a monetization initiative to encourage trade in the precious metal.

On Oct. 24, the government opened for subscription the sixth tranche of its sovereign gold bond scheme till Nov. 2, to coincide with the festive season. Bonds are being sold through banks and other entities such as recognized stock exchanges, and will be issued on Nov. 17 with 2.5% annual interest.

India is also celebrating Dhanteras, a festival falling two days before Diwali which is considered auspicious for buying gold. As many Indians buy the metal as an investment, analysts feel that people looking to secure high returns would prefer government bonds instead of physical gold.

"The tenor of the bond will be for a period of 8 years with exit option from the 5th year to be exercised on the interest payment dates," a government statement said.

Jewelry demand in India for the first half of 2016 was the lowest since 2009 at just 186.3 tons. During the April-June quarter, around 98 tons of gold jewelry was sold in the country, down 20% year-on-year.

According to G V Sreedhar, Chairman of the All India Gems & Jewellery Federation, demand has picked up in the country's north, west and eastern regions during the current festive season.

"A very positive response is coming for Dhanteras," he told the Nikkei Asian Review, expressing confidence that sales would increase 15-20% in the quarter ending in December as compared to last year.

Gold rates have come down to less than 30,000 rupees per 10 grams after hovering above it for 4-5 months, and abundant monsoon rains this year have led to revival of demand in the countryside, he noted.

According to industry sources, the second half of the year is expected to account for over 400 tons of gold consumption in India.

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