Previously stumped by the rising price of rough diamonds this year, Indian manufacturers are now being hit by the falling rupee, which is sending the price of imported rough diamonds skywards as the rupee plumbs record lows of around 59 to the U.S. dollar.

Consumer sales are also being affected as higher prices feed through to stores, with the rupee falling by more than eight per cent since May 2013. India is the third-largest market in the world for diamond jewellery. “We have to calculate the price of polished stones in dollars,” said Praveen Nanavaty, chairman of Surat-based jewellery Company SHE Jewel. “However, a stone that cost 80,000 rupees a few months ago would now command a price of 100,000 rupees due to the weakening of the rupee.”

In the first quarter of the current fiscal 2013-14, the rupee has depreciated by nearly 8.5 per cent against the dollar. “Rupee has breached the 61 mark against the dollar on July 8, 2013 and touched all-time low of 61.21,” said Namit Dave, an analyst.

DipakChoksi, regional chairman of the All- India Gems and Jewellery Trade Federation (GJF), shared, “Polished diamonds are priced in dollars and the consumers have to pay as per the current rupee rate. Add to this, the eight per cent duty on gold import. The end diamond jewelry articles are going to be more costly than they were a few months ago.”

The dwindling rupee is not a good sign for the diamond jewellery industry, which is growing at 25 per cent year-over-year. It is a fear that end consumers will not be able to absorb such a huge price difference. The rupee’s latest decline has taken it much below its prior all-time low of 57.32 reached on June 28 last year.

The large current account deficit (CAD) has been a huge problem for the government who seems satisfied with a weaker rupee. The sinking rupee has helped the government to curb importsin aneffort to restraint India’s large currentaccount deficit.As part of that policy, thegovernment also increased duty on gold to eight percent from six per cent after demandfor the yellow metal soared in Mayto around 162 tons – almostdouble the average monthly level.

Though emerging marketcurrencies in general have beenhit by the dollar’s rise, which wassparked by a strong U.S. jobsperformance in May, the rupee hasbeen the hardest hit. But, has it stopped the Indian buyers from buying? The sinking rupee is beneficial to the exporters and it is a known fact that India processes more than 90 percent of the world's diamonds, most of which are exported. So, what are the true implications of this phenomenon?

Johan Dippenaar, Petra Diamonds, Chief Executive Officer told a wire agency, "Indian companies are still strong buyers, but I don't want to for one moment say 'no' it (falling rupee) will certainly have no effect."

Petra Diamonds hadheld an auction in Johannesburg recently. "We have not noticed an impact (from the weak rupee) on the number of Indian clients attending," company spokeswoman Cathy Malins shared.

India imported 31 million carats of rough diamonds in April-May, up about 26 percent from the same period in 2012, according to data from the Gems and Jewellery Export Promotion Council, an Indian trade body.

Petra Diamonds, which has seven producing mines in South Africa and one in Tanzania, is also sensitive to the movement of the South African rand, which hit a 4-year low against the U.S. dollar in June.

Like the rupee, the rand is getting hit by both local economic factors and demand for dollars as the U.S. economy recovers, arousing talk that the U.S. Federal Reserve will soon start to wind down its stimulus programme.

We asked Hitesh Patel, Director, Dharmanandan Diamonds for his view on the effects of the falling rupee. He shared, “Indian Diamond Industry is exporting the loose polished diamond nearly 85 to 90 per cent compared to importing the rough diamonds around 95 to 100 per cent. This trade deficit is believed to be consumed in India or it is churned in the stock of supply chain. As we already know, Indian jewellery market mostly trading in rupees, if Indian rupee has sunken against dollar this directly affects the cost of diamonds in the Indian diamond jewellery market.”

When quizzed which section of tradesmen are being the worst hit due to this phenomenon, Patel explained, “Looking at the current scenario, it is very difficult to do business for a small diamond manufacturer. Tradesmen are already working with very low profit margins due to the imbalance of rough and polished prices. For a smaller manufacturer the small profit has highly crunched due to the devaluation of the rupee.”

Vijaybhai of JB & Brothers had a different opinion. He said, “Diamond industry is not being affected by the dwindling rupee as the rough procurement is done in U.S. dollars and so is the sale of polished diamonds. In the world market, the prices of rough diamonds were already high and hence the rough procurement is expensive. It does not have much concern with the fall in rupee because the transactions are dealt in U.S. dollars.”

When asked about the affect of it on the Indian consumers, he explained, “Indian consumers have paused their purchases; as they are waiting for the dollar rate to get steady.” He also stated. “A large population of Gen Y (youngsters) forms Indian consumer base. And as some of the surveys suggest; these Gen Y have an affinity towards electronics and gadgets. So the challenge faced by the diamond jewellery in India is to establish the ‘Top of the Mind’ position amongst other competing products. The competition is wide e.g. White Goods; Electronics & Gadgets; Luxury Holidays; Automobiles (Cars & Bikes), etc. These are the segments giving tough competition to diamond jewellery. Overall, the discretionary income of Indian Gen Y is increasing and hence there is a thorough requirement to leverage marketing and branding expertise of the industry to create a positive effect.”

Hitesh Patel had a varied opinion about the effects of the falling rupee on the end consumer. “I don’t think it will effect theend consumer significantly. No one postponed their proposal to their beloved due to increase of diamond prices, neither marriages nor occasional gift. Diamond has a sentimental value and people will keep buying it for their loved ones,” he quips with a smile.

Amongst all this, most of us forget the plight of the poor diamond cutting and polishing workers. As rightly pointed out by Hitesh Patel, the small-scale manufactures are getting hit the worst as their profit margins are diminishing. Some of them have already closed shops leaving hundreds of workers with an uncertain future.

If the Indian rupee continues to weaken further against the U.S. dollar, the country’s diamond industry would have fewer rough diamonds to process in the coming days. This is because the purchasing power of the players will become weak with the declining rupee.

Diamond jewellery, cutting and polishing units are lying idle pan India at a time when the country is experiencing severe shortage of gold in the wake of several restrictions imposed on the yellow metal’s import.

“The dwindling of import of gold is also one of the factors for diamond cutting and polishing units to lie idle,” views Manoj Seth, an analyst.

Coupled with the gold problem, the fall in the rupee’s value has hit the supply of rough diamonds and as a result small and medium-size diamond cutting and polishing factories have also been badly affected. “The weakness in the Indian rupee has made imports of rough diamonds expensive. Diamond value has increased due to the high dollar value,” said some Indian jewellers who import rough diamonds.

“Rough diamond prices have gone up by around 7 per cent to 10 per cent,” said Alok Mondal, Head of Department- Sample, Gold Star Jewellery India.

While Suhas Bhuia, Product Development Head, Gold Star Jewellery India, said with the credit limit being affected, many small and medium diamond players have cease to exist. “It is not that the depreciation of the Indian rupee is the only factor but too much restriction imposed by government on the import of gold has proved to be challenging for players to survive.”

When asked about the company’s performance, Bhuia said in two words that the jeweller has “enough orders”.

“Diamond industry is already facing severe liquidity crisis and cash flows are further impacted significantly as the diamond companies, especially the small and mid-sized ones had to pay at the depreciated rate of even 61.21 some weeks ago,” said Kaushlendra Singh Sengar, a diamond analyst.

The relentless fall of the rupee has dampened demands for rough diamonds, as the rupee is down by about 11 per cent since the start of May.

Take for instance diamond merchants, who had booked rough diamond consignments worth $1 million last month, when the exchange rate of rupee was at 55 per U.S. dollar, have to pay Rs 4 extra on the import at present, considering that the rupee is 59 against the dollar, added Sengar.

The purchasing power of diamond companies enjoying bank credit facilities have reduced by almost 15 per cent in the past fortnight, industry sources said.

Jewellers confirmed that they do not have work due to the shortage of gold import currently. “Apart from this, small and medium-size diamond cutting and polishing factories have also been badly affected in many parts of the country,” jewellers added.

Small and medium unit owners have stopped the import of rough diamonds as rupee plunged to a record low against the U.S. dollar.

“Around 10 per cent of the factories in Surat have been closed, while another 10-15 per cent is left with no work currently. They are waiting for a change in government policy for adequate supply of gold, coinciding with the restoration in demand both from domestic and international markets,” said a diamond jeweller.

A Kolkata-based diamond jeweller said: “Business has halved in the past few weeks.”

The official spokesperson of the manufacturer of rough and polished diamonds and jewellery, Rosy Blue India said many diamond players have been affected without divulging much detail about the company’s performance.

Around 15 per cent companies have also closed their work. Sources said more than 1,200 small and medium diamond unit owners in Surat have closed their shops when not being able to purchase rough stones after the rupee fall against dollar leading to prices that have touched an all-time high.

“The fall in the rupee’s value has hit the supply of rough diamonds,” said Manoj, adding that for a long term improvement plan and continued existence of the sector, the government has to appoint market people in policy making.

Imports in April and May together were a little over 300 tonne. This fell to 38 tonne in June. Excess imports in May gave some initial relief but that cushion is long gone, experts said.

The jewellery industry is pegged at around Rs 2.7 lakh crore, involving around six lakh units and employing a little over 10 million people at present.

In the gem and jewellery sector, the month of May till July is considered an off-season. Workers mostly take time off to visit their native places or hometown and the demand during this season is normally low.

Mondal further added that in some locations workers are going against owners. “Contractors are working at an agreed package of Rs 60-Rs 120 per day in the absence order from clients,” he said.

Talking about Gold Star, he said the company employs around 700 workers.
Also, the diamond merchants want to sell at higher price because they want to maintain an inventory in and out at the market value, which is not accepted by customers, views Seth.

India imported 31 million carats of rough diamonds in April-May, up about 26 per cent from the same period in 2012, according to data from the Gems and Jewellery Export Promotion Council, an Indian trade body.

“For the next 3-4 months, the market will remain grim, so it is better to avoid dealing in diamonds. Many have shut shop and waiting for the rupee to recover as buyers too are reluctant to buy,” views Sengar.

It is learnt that since the rupee fall is reported, more than 25,000 workers have been rendered jobless.

“Nobody wants to take any risk now as importers are still worry about weakening of Indian rupee,” concluded Sengar.