Jewellery industry is expected to grow by just 3 per cent in 2016 in value terms, mainly on account of steady rise in gold prices that has affected volumes, according to rating agency Icra. 

"During the current calender year, the jewellery industry is estimated to record 3 per cent value growth, which is lower than our earlier estimates of 5-6 per cent growth. This is largely owing to steady rise in gold prices denting volumes," Icra said in a report.

However, the overall volumes are likely to be buffered to an extent by improvement in rural demand on the back of better monsoon, renewed expansion thrust of organised players and higher than expected recycling of gold with rising prices, it said. 

Icra said emphasis on boosting rural economy in the Union Budget 2016-17 is also likely to spur rural demand which could augur well for the industry over the next three years. 

Organised retailers, who comprise 25 per cent of the market, are expected to continue recording better volumes than the industry, mainly due to changing consumer preferences towards branded players, it said. 

Hence, the ratings agency said improved financing environment would support capital requirements for the branded players to pursue expansion. 

Implementation of hedging mechanisms and evolution of formal corporate setups are expected to help organised players navigate through volatility in the sector even as the overall regulatory environment continues to be focused on reducing investment-related gold demand to reduce imports, it added. 

Icra expects volumes to recover in 2017 after the likely stabilisation of gold prices at higher levels. 

In recent years, price volatility has become one of the major demand dampeners in India resulting in recycling activities, the report said. 

However, it has been witnessed that consumers revert to fresh purchases after price stabilisation, indicating the fundamental strength of jewellery demand, it said. 

There have also been periods where demand has increased in spite of price rises, propelled by consumer expectations of further spike in gold prices, Icra added.