Focusing on Gold. What impact does the strong Rupee have on Indian Gold demand

India's demand for gold slackened on Wednesday as prices hardened, but dealers said the appetite of the market was full after moderate buying the previous day when prices dipped.

"Yesterday, after a long time, there was some buying," said Ajit Shinde of Magna Projects Pvt Ltd in Kolkata, a large wholesaler. "Now it is quiet with people waiting for lower levels."

Dealers in banks also said they sold at the previous day's dips to around $722-$725 an ounce.

"We saw decent buying," said one dealer in a large private bank. "People would wait for the same kind of levels today."

Demand for gold is expected to be dim ahead as Shradh -- a phase considered as inauspicious -- starts on Thursday. Unless prices see an exceptional fall, buying would remain low.

Overseas gold was firm owing to a weakening dollar verses a basket of other currencies on raising expectations of further rate cuts in the United States. Weaker dollar fuels gold's rise as the two compete for investors' wealth.

In the local market, a stronger rupee against the dollar muted some of gold's gains as most of India's precious metals are imported and priced in dollars.

Following was the price of .995 gold in the spot market in rupees per 10 grams at 1:05 p.m. :

Bank Wednesday Tuesday

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Forward contracts for three to five years being struck to curb impact of appreciating rupee.

The unrelenting rupee rise is forcing exporters to take the unusual step of covering their foreign currency risks over a longer term of three to five years.

Normally, foreign currency exposures are covered for a maximum of a year, but now exporters are contracting forward contracts for three-five years to curb the impact of an appreciating rupee on their profits.

These long-term contracts are benchmarked to the Mumbai interbank forward rate (MIFOR), which is the implied rate for three or five years based on six-month forward rate for dollars.

Forward rate is the rate agreed to by two counterparties to a forward contract for a foreign currency with payment at a future date.

Another category frantically covering foreign currency exposure is the set of companies which have raised external commercial borrowings. This has triggered a two-way interest in the forward market, both from exporters receiving dollars and companies needing to pay dollars in future.

The heightened activity in forwards market has led to the MIFOR hardening � from 6.45 per cent to 6.65 per cent for three years and from 6.50 per cent to 6.90 per cent for five years. This is the rate of interest an importer or exporter would be required to pay based on the current spot dollar rupee exchange rate.

Hedging of commodity exposures has also risen sharply with volatility in global markets. Commodity hedging by Indian companies is in vogue following high volatility in the base metal prices.

This has been possible since the RBI has allowed Indian companies to hedge their exposures in commodities in the international exchanges. According to bankers, the hedging is mainly done in the international market, facilitated mainly by those banks which have presence in India to a large extent.

The companies are mostly hedging positions in base metals such as copper, zinc, aluminium, and gold. Incidentally, aluminium prices have fallen by 15 per cent since June from highs of $2775 per tonne to $2350 per tonne.

While gold prices have risen by 7 per cent from $662 per ounce to $710 per ounce, there has been a 24 per cent fall in zinc prices from $3710 per tonne to $2791 per tonne.

Bankers with foreign banks said commodity hedging was being done through buying of futures in overseas exchanges and striking structured options in the over the counter markets.

In a futures contract, a company is obliged to buy or sell while options contract gives it the right to either buy or sell with no obligation to do so.

Rupee / US Dollar Forex Currency News, Gold in India, and The Sensex index on the Bombay Stock Exchange (BSE). Euro / Rupee and Yen / Rupee.

India's gold demand picked up slightly on Thursday as the rupee appreciated against the dollar easing the import-driven metal's price, but a majority of the buyers waited for further falls, dealers said.

"There was some small interest this morning," said one dealer in a large private bank, "But nothing now."

The rupee, at a 9-year high against the dollar in the wake of a cut in U.S. interest rates, raised expectations of further falls in the price of gold, dealers said.

Overseas gold was up and seemed to aim at its 26-year high of $730 an ounce set last year in May, but traders and retailers said they believed it was overbought, and may head down.

"Nobody is fixing prices yet," said Rahul Gupta, director of PP Jewellers in New Delhi, referring to his wholesale clients.

Gupta said his clients were waiting for a fall to 9,200 rupees per 10 grams levels.

India's busy season is now on, but will be interrupted by an inauspicious phase from Sept. 27 to Oct 11, when weddings are not usually scheduled.

Yet, if prices are right, buyers would book gold to take deliveries later, most dealers said.