India's clampdown on 'black money' curbs gold appetite: Kotak

India's crackdown on undisclosed foreign assets and income is curbing demand for gold in the world`s second-biggest consumer, while rising real interest rates and better returns from other financial markets are also hurting purchases, a banker said.

Although consumption should pick up from now until the end of the financial year, when India buys more for gifting during festivals and weddings, weak demand so far has dragged on the global gold price that has shed nearly 9 % from a two-year high in July to $1,258 an ounce on Tuesday.

"There is a crackdown on black money in India and many people who were looking at gold as an investment for unaccounted income are no longer investing in gold at all," Shekhar Bhandari, executive vice president of Kotak Mahindra Bank, told Reuters on the fringes of an industry meet.

Unofficial estimates suggest funds illegally deposited in banks outside the country to avoid tax, known as "black money" in India, account for about 10-30 % of the country`s gold demand, said Bhandari.

A tax evasion amnesty scheme, led by the government of Prime Minister Narendra Modi, that closed in September disclosed nearly $10 billion in undeclared income.

India`s gold demand has also been hit by higher returns from other asset classes, Bhandari said, with returns on equities and bonds at 12-13 % dwarfing gold`s 0.9 % in terms of rupees since 2013.

Rising real interest rate due to declining inflation is dimming gold`s draw as well.

PATHETIC

"The returns on gold in rupees is pathetic," Bhandari said. 

"I think it won`t be advisable to invest in gold given current levels where investment returns are likely to be negative in Indian rupees."

India`s gold imports fell for a ninth month in September as weak retail demand and higher discounts prompted banks and refineries to cut overseas purchases.

But imports in the second half of India`s financial year to March will probably be 25-50 % more than the first half, said Sunil Kashyap, managing director for global banking and markets at Scotiabank.

"With Diwali just about two weeks away from now, demand so far looks good. Expectation is that it`ll sustain until the end of the year," Kashyap said.

Gold discounts dropped to the smallest in nearly nine months last week as the festive season began.

"If stability of the rupee continues and gold prices are stable, then we can expect positive trends. But any kind of volatility could hamper gold," said Scotiabank`s Kashyap.

(Reporting by Manolo Serapio Jr. and Koustav Samanta; Editing by Himani Sarkar)