Monsoon concerns weigh on Indian gold demand, prices at discount

By Rajendra Jadhav and A. Ananthalakshmi

MUMBAI/SINGAPORE (Reuters) - Indian gold demand remained sluggish this week as concerns over a weak monsoon forced farmers, key to the country's bullion demand, to cut back spending.

Indian prices are at a discount of around $1 an ounce to the global benchmark, said traders.

Nearly two-thirds of India's gold demand comes from rural areas where jewellery is a traditional store of wealth for millions who have no access to the formal banking system.

"Demand is quite weak compared to last month," said Mangesh Devi, a jeweller from Maharashtra whose customers are mainly sugar cane and vegetable growers.

"Farmers are giving priority to buy seeds and fertilisers. Farmers don't have surplus money to buy gold as last year's drought has affected their income," Devi said.

Indian farmers usually start sowing summer-sown crops with the arrival of monsoon rains in June.

Policymakers in India are worried about the prospect of a second straight year of drought for the first time in nearly three decades after the country's weather office forecast below- average rains this summer. Monsoon rains in June-September are vital for half of India's farmland that lacks irrigation.

"Demand will remain weak in next few weeks unless prices fall below 26,000 rupees (per 10 grams)," said a Mumbai-based bank dealer.

A sharp slide in Indian demand could add to pressure on global gold prices. India was the top consumer of the metal in 2014, and the second biggest after China in the first quarter of this year.

Demand elsewhere in Asia also remained tepid due to expectations of a further drop in gold prices and better returns from surging equities in China.

Premiums on the Shanghai Gold Exchange were about $1-$2 an ounce, little changed from last week. Premiums in Singapore held at around $1 an ounce.

In Hong Kong, premiums dipped slightly to 70 cents to $1 an ounce, from about 80 cents to $1 last week.

"The tight price range over the last few months is not bringing a lot of physical demand. Many buyers think prices will fall further due to expectations of U.S. interest rate hike," said Ronald Leung, chief dealer at Lee Cheong Gold Dealers in Hong Kong.

"The dollar has to weaken significantly for the demand to come back," he said.

Some analysts have also said physical demand could pick up if prices drop below $1,150.

(Editing by Richard Pullin)