Gold demand seen falling to 7-year low in March quarter

Demand is expected at 60-70 tonnes, lowest since Q1 of 2009, when local purchases totalled 41 tonnes

India's gold demand in the March quarter is set to drop by about two-thirds from a year ago to its lowest in seven years, as higher prices and a strike by jewellers curbed sales in the world's second-biggest consumer, retailers and analysts said.

The sluggish demand could weigh on global prices, which are headed towards their biggest quarterly gain in nearly 30 years, but will help the country bring down its trade deficit.

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Two-thirds of India's gold demand comes from villages, where jewellery is seen as a mode of investment and wealth creation. Rural demand is slack after the first back-to-back drought in nearly three decades squeezed farmers' earnings.

In the March quarter, India's total gold demand is expected at 60-70 tonnes, the lowest since the first quarter of 2009, when local purchases totalled 41 tonnes, said Sudheesh Nambiath, a senior analyst at consultancy Thomson Reuters GFMS.

In the first quarter of 2015, consumers bought 179.5 tonnes.

"The spike in gold prices, drop in the earnings of farmers due to bad weather and the jewellers' strike pulled down demand," Nambiath said.

Despite offering record discounts, traders were struggling to clear inventories, said Daman Prakash Rathod, a director at MNC Bullion, a wholesaler in Chennai.

The discount hit a record $53 an ounce to the global spot benchmark in late February.

Many buyers have also turned sellers to cash in on higher prices.

On Feb. 11, Indian gold futures touched 29,251 rupees (about $428) per 10 grams, hitting their highest level in nearly two years.

Indian jewellery sales have fallen since the start of the year, hit by higher gold prices and delayed purchase decisions by consumers, who had hoped the national budget would cut an import duty of 10 percent.

But Finance Minister Arun Jaitley surprised the market by maintaining the level and imposing an excise duty on jewellery sales from March 1.

Jewellers went on an indefinite strike since the start of the month to protest the reintroduction of a sales tax on gold jewellery after four years. The strike was later called off on assurances by the excise department that it would not "harass" jewellers over collection of a new tax.

Although the national level trade bodies of bullion dealers and jewellers called off the strike on March 19, various regional industry associations decided to continue with it until the government rolled back the tax.

"Demand will improve in the next few weeks if this strike ends," said Harshad Ajmera, proprietor of JJ Gold House, a wholesaler in Kolkata. "Consumers have to buy for the wedding season."