Why gold demand in India is hit

Strict rules on gold imports are succeeding in curbing demand from India, with the nation likely to lose its crown as the world's biggest consumer of the precious metal to China, the World Gold Council said.

The producer-funded industry body cut its forecast for demand from India in 2013 to around 900 tonnes from the 1,000 tonnes predicted previously, although that would still mark a slight rise from last year.

Global appetite for gold fell 21 per cent in the third quarter as outflows from physical bullion funds and the drop in buying from India offset firmer jewellery, coin and bar sales, a quarterly report from the WGC showed on Thursday.

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"The administrative measures that the Indian government has imposed on the market have proven to be quite effective and imports have slowed down," Albert Cheng, WGC's managing director for the Far East region told Reuters.

"It would be difficult to get to 1,000 tonnes."

The body maintained its China forecast of a record 1,000 tonnes of demand in 2013.

India, grappling with a high trade deficit and a weak rupee, imposed a series of measures this year to crimp demand for the metal -- the second most expensive item on its import bill after oil.

It introduced a record 10-per cent duty on gold imports and tied the volume of imports to exports, making it more difficult and expensive for gold to be sold to domestic markets. Imports plummeted to 24 tonnes in October from a record 162 tonnes in May.

But the WGC warned that gold was finding its way into India through unofficial channels.

It did not give an estimate on supply through smuggling.

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"Gold entering the country unofficially through India's porous borders helped to meet pent-up local demand, together with an influx of recycled gold that was drawn out by higher prices and promotions offered by retailers," the WGC said in its quarterly report.

"It is likely that unofficial gold will continue to find its way into the country to satisfy demand."

The rural population accounts for about 60 per cent of gold-buying in India, where the precious metal forms a key part of a bride's dowry and is considered auspicious as a gift or offering at religious festivals.

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Based on WGC's third-quarter report, demand from India so far this year has totalled 714.7 tonnes, lower than mainland China's 779.6 tonnes.

"If not for administrative measures, India would have seen growth like China," Cheng said.

Demand from China has jumped nearly 40 per cent this year.

Appetite for jewellery and bars and coins has remained strong throughout the year even during the historically weak third quarter due to a near 25 per cent drop in gold prices.

Fourth quarter demand will also remain strong as buying picks up ahead of the Chinese New Year at the end of January, Cheng said.