During the five-day festival, which started with Dhanteras on Sunday, people purchase gold to greet Lakshmi, the goddess of wealth. They believe she will bring blessings and fortune to the entire family.
According to one jewelry shop owner in Mumbai, the gold price this year is about 32,000 Indian rupees (585.87 U.S. Dollars) per 10 grams, a 15 percent increase from 27,000 Indian rupees (494.32 U.S. Dollars) per 10 grams a year ago.
"Last year the price was less. This year it has gone much higher. It is now 32,000 (Indian rupees/ 10 g) probably, approximately, " said Annuta, a gold purchaser. "So naturally last year what we purchased, this year we cannot afford. So we have purchased something which is lighter."
According to Prithviraj Kothari, former president of the Bombay Bullion Association Ltd (BBA), festivals and weddings stimulate the demand for gold. However, he said there are a few reasons for the soaring price of gold this year.
"Because of the depreciation of the rupee compared to last year and the duty hike in January and March," he said.
The Indian government increased the import tariff of gold to four percent on Mar. 15 this year to cut the financial deficit. The expenditure is predicted to drop from 58 to 38 billion U.S. dollars.
Moreover, Kothari said U.S. President Barrack Obama would probably continue quantitative easing, which means gold will cost more for investors holding other currencies.
As the price of gold is rising, diamond prices are dropping and many wealthy Indian families have started to favor the precious gem.
"On this day of Dhanteras, people used to buy gold and silver jewelries. But this year, compared to last year, people are coming to us to buy diamond jewelry, and now there is new trend for the teenagers, they love to wear diamond jewelry which has been crafted with small delicate designs and everything," said Abhish, manager of a jewelry shop in Mumbai.
BBA President Mohit Kamboj said the import volume of gold dropped from 967 tons last year to 550 tons this year due to inflation and high gold prices, which affected customers' disposable incomes.
The demand from farmers and workers in rural areas accounts for 70 percent of the entire Indian gold market.
"In rural parts, there's a thing that gold is the best investment, because they don't believe in commodities, stocks and properties. They believe all in gold, which you can get cashed anytime in 24 hours, seven days a week," said BBA president Mohit Kamboj.
However, crop failures this year caused by the drought during the country's rainy season has affected many farmers to buy gold.