Demand for physical gold in India improved slightly this week because of a correction in local prices, but recent restrictions on the industry and increased smuggling took the sheen off the bullion market heading into the peak festival season.

Dealers in India were offering a discount of up to $3 an ounce this week, down from $6 the previous week. Local gold prices fell to 29,260 per 10 grams on Wednesday, the lowest level since Aug. 28.

“Smuggling has gone up in the past few weeks. It has been distorting legal trade as banks can’t give huge discounts like operators in the grey market,” said one Mumbai-based dealer with a private bank.

Gold smuggling in India, the world’s second-biggest consumer of the metal, is likely to rise during the peak holiday season as buyers try to avoid paying a new sales tax and to dodge new transparency rules.

Indians will celebrate Diwali in the third week of October, a holiday period in which the buying of gold is considered auspicious.

“We are making bare minimum purchases as demand was very weak during Dussehra (festival) due to the PMLA (Prevention of Money Laundering Act). We are afraid demand could be lower even during Diwali,” said Aditya Pethe, a director at Waman Hari Pethe Jewellers.

In August India brought sales of gold under the PMLA, which makes it mandatory for jewellers to keep records of customers’ personal identification numbers or tax codes for transactions above 50,000 Indian rupees ($765).

Elsewhere in Asia, gold markets were quiet because of the Golden Week holidays in China.

In Hong Kong, premiums were between 40 cents and $1 over benchmark prices, mostly unchanged from last week’s 50-90 cent premiums, one Hong Kong-based dealer said.

In Singapore, premiums were quoted around 80 cents, compared with the between 50 cents and $1 last week.

“On the physical side, trading wise, we haven’t see much movement because of the Golden Week,,” said Brian Lan, managing director at dealer GoldSilver Central in Singapore.

Safe-haven buying of gold during the past quarter has also faded on decreasing geopolitical risks surrounding North Korea, he added.

Benchmark spot gold prices were on track to for their fourth straight weekly decline, pressured by gains in the U.S. dollar on expectations of a December interest rate hike in the United States.

Gold is highly sensitive to rising U.S. interest rates, which increase the opportunity cost of holding non-yielding bullion.

In Japan, discounts of 30 cents were offered, more or less in line with the previous 30-40 cent range. ($1 = 65.3750 Indian rupees)

(Reporting by Rajendra Jadhav in Mumbai,; Apeksha Nair and Arpan Varghese in Bengaluru; Editing by David Goodman)

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