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Indian gold demand subdued by weak currency

India's gold demand will likely remain subdued in the near term because of the country's weak currency and shaky stock market, traders said on Tuesday.

Gold imports are likely to drop marginally due to weakness in the rupee against the dollar and a decision by state-run banks, leading importer-suppliers of the yellow metal, to cut their exposure to the bullion business, they added.

"Demand for gold is subdued at the moment as the rupee has weakened, making the yellow metal slightly costlier," said a trader in Ahmedabad, a leading bullion trading centre.

But traders said demand for gold could revive during the marriage season that has just started, provided the rupee remained stable. Gold demand in India normally rises during the Hindu wedding season that starts in April and lasts till June.

The rupee slid to a new intra-day record low of 47.10 per dollar on Tuesday -- taking losses to over one per cent in a week -- before firming on central bank suggestions that the currency was not as overvalued as the market believed.

"The market is weak and margins have fallen due to rising prices," Chetanbhai of Zaveri Bullion said.

Gold prices rose on Tuesday to Rs 50,300 per bar (of 116.64 gm) from Rs 49,700 on Monday.

Traders said steep share price falls on the back of allegations of price manipulation weighed on the bullion market because investors' capital had been eroded.

"The negative sentiment on stock exchanges is bound to reflect in other high-value markets like bullion," said Dhanesh P Soni, a leading Ahmedabad-based bullion trader.

He said the rise in gold prices had reduced traders' margins.

MARGINS FALL SHARPLY

Most of the traders who take delivery of the metal from importer-suppliers like state-run banks and trading firms were getting a margin of only about Rs 100 a bar compared to a margin of Rs 300 to Rs 400 a month earlier, Soni said.

Traders said a few state-run banks have stopped trading in gold after the troubled Classic Cooperative Bank failed to honour payorders issued by it on behalf of a leading bullion trader.

State-run Bank of India and Punjab National Bank no longer supply gold in Ahmedabad and the State Bank of India has cut down its exposure to the bullion market.

The Reserve Bank of India has also tightened bullion-trading norms for commercial banks after payment orders to four banks issued by the troubled Classic Cooperative Bank bounced last month. The central bank pegged the commercial banks' exposure in these deals at Rs 696 million.

Traders said other banks such as HSBC had stepped up supply of gold to traders in Ahmedabad after the state-run banks reduced their bullion business. An HSBC spokeswoman said the bank began trading in gold in March from Ahmedabad but gave no details about daily volumes.

Traders said Jaipur, the capital of northwestern state of Rajasthan, was fast emerging as a major centre for bullion imports.

"Jaipur is emerging as an ideal alternative for Ahmedabad because it has lower local levies," said Sanjaybhai of city-based Kiran Jewellers.

Authorities levy a one percent sales tax on gold imports in Ahmedabad compared with only half a percent levy in Jaipur.

Average daily gold imports into Ahmedabad have fallen to 2,000-3,000 bars from about 10,000-12,000 bars about two months ago, traders added.

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