Small-sized silver bars and coins dominated festival sales in India, the world's top consumer, as precious metals consumers hit by inflation chose the cheaper white metal in hopes of future price gains.

On Monday, India celebrates Dhanteras, the first day of the five-day Diwali festival, considered auspicious for buying of precious metals.

We are interested in silver coins for mahurat (auspicious) trading. We can buy more silver for a lesser amount. For gold we will have to pay a high amount, said 50-year-old P.S. Singhvi, a businessman, in Hindi.

He was one of the prospective customers in a queue of more than 100 people outside the 223-year-old Narrondass Manordass establishment at Sheikh Memon street in Mumbai's Zaveri Bazaar, one of the busiest bullion markets in India.

Singhvi said he has been buying the white metal from Narrondass Manordass for 25 years.

Silver is down 28 percent from its April peak, compared with a seven percent fall in prices of gold since its peak in September.

The yellow metal traded at 26,854 rupees per 10 grams on Monday, while silver was a little over 53,000 rupees per kg.

India could import 250-300 tonnes of silver during the quarter, Prithviraj Kothari, president of the Bombay Bullion Association, said earlier. Gold imports are seen rising 30-40 percent, traders said.

There are more silver sales than gold and people are buying for investment purposes, said 32-year-old Vikas Rawal, manager at Mumbai-based retailer U.T. Zaveri. If we look at the gold and silver ratio, silver is more.

INFLATION BITES

The disposable income of consumers which might have been used to buy gold has been reduced by stubbornly high inflation that has prompted the central bank to increase interest rates a dozen times in the past 18 months. Its key rate stands at 8.25 percent.

Earlier, we used to sit until midnight for sales, said Rawal, adding that this was no longer the case due to inflation. Most stores were empty other than a few widely trusted jewellers.

There are no customers at jewellery showrooms. Coins of 1 gram, 2 grams, etc are flavour of the season, said Ashok Jain, proprietor of Chenaji Narsinghji at Mumbai's oldest jewellery market.

India's gold imports rose 29.9 percent to 265 tonnes in the last quarter of 2010. Investment demand rose 15 percent 74.4 tonnes, while jewellery demand rose 47 percent to 210.5 tonnes in the December quarter. Shipments are expected to be robust this year.

ETF SALES ZOOM

Volumes at the country's biggest gold fund, Benchmark Mutual Fund, owned by Goldman Sachs Asset Management (India) pvt Ltd, rose by more than 17 times to 1.01 million units from an average of 59,002 units, indicating acceptance of the paper form of gold as an investment on the auspicious occasion.

The fund recorded a volume of 1.115 million units on Akshaya Tritiya Day, another big gold buying festival in India.

Overall sales have been much higher than average, and with the extended trading hours, its likely to increase further, said Chirag Mehta, gold fund manager with Quantum Asset Management Company, which manages 450 million rupees in the fund.

The Bombay Stock Exchange, which sells the gold ETF, have extended trading hours and waived transaction fees for Dhanteras sales, its spokesperson said in a statement.

As the awareness of gold ETFs increase and people understand that gold ETFs are as good as gold as each unit is backed by physical gold, more customers are preferring this form for purchase, Mehta said.

The World Gold Council, an association funded by global gold miners, expects ETF demand in India to explode as investors get accustomed to click-and-park investing, shying away from sagging stock markets and as high inflation eats into bank savings.

ETF gold collections are minimal compared with India's annual consumption of about 900 tonnes, but fund managers pin high hopes on this form of paper gold.