Gold demand muted in festival season

By Siddesh Mayenkar

MUMBAI (Reuters) - Gold premiums in India halved on Tuesday from last week because of unusually muted demand during the festival season and as supply was set to improve after some importing agencies began purchasing for domestic use.

Local prices were $60-70 an ounce higher than London prices, compared with a record high of $130 an ounce last week.

India, struggling with a high trade deficit and weak currency, has been trying to curb demand for gold, the second-biggest import item after oil.

It has made gold expensive for consumers by setting a record 10 percent import duty and made supplies harder to come.

Imports had virtually stopped since late July, when the central bank required that 20 percent of all imports be re-exported. Importers have been buying for exporters first before supplying for domestic use.

"Premiums have come down as imports are happening through Bank of Nova Scotia and MMTC," Bachhraj Bamalwa, director with the All India Gems and Jewellery Trade Federation, told Reuters.

Bank of Nova Scotia is the biggest gold-importing bank in India, while MMTC is the biggest state-run gold trading firm.

Premiums could fall to $30-40 by next week as imports pick up, Bamalwa said.

A source at an importing agency said it had brought in small lots in Ahmedabad and some southern Indian cities.

The agency has yet to begin imports in Mumbai, India's financial centre, as it was waiting for performance data from exporters, the source said.

The new rule on imports has made it compulsory for exporters to show what they have done with a first two lots of imported gold before importing a third.

India celebrated Diwali and Dhanteras - the biggest gold buying festival - last Friday and over the weekend, but scarce supplies and higher prices deterred consumers, many of whom opted for alternative gifts.

Gold has a cultural value in India, which was the biggest buyer of gold last year, as many believe that buying it on auspicious days brings good fortune.

India imported 23.5 tonnes in October compared with a record 162 tonnes in May.

Demand in the rest of Asia was also subdued, with premiums remaining unchanged from last week.

(Additional reporting by A. Ananthalakshmi in Singapore; Editing by Alan Raybould)