(REUTERS) -- Indian gold imports in 2012 could fall by a fifth for the first time in three years to 770 tonnes as investors chase better accruals from equity markets and other financial instruments, possibly ceding the position of top consumer to China.

Gold prices in Indian rupees have gained five percent so far in this calendar year as compared to 17.5 percent gains in stock markets in Asia's third largest economy which seems to be recovering after a dismal 2011.

We see a drop of 15-20 percent in gold imports compared to previous year because of high prices, and stock markets performing well lately, which could dent investment demand, Gnanasekar Thiagarajan, director with Commtrendz Research, told Reuters on Thursday.

Given the improved economic sentiment, helped by an easing of inflation and a recovery in the Indian rupee, a government panel has also estimated gold imports to fall by 35 percent by value to $38 billion in the year to March 2013.

Indian gold shipments ended flat at 967 tonnes in 2011, after a 44 percent fall in imports in the December quarter. India had seen a yearly fall in gold imports in 2008, when shipments declined by 14.17 percent to 660.2 tonnes.

In comparison, the World Gold Council (WGC) expects China's demand to rise by 20 percent in 2012 from 811.2 tonnes a year ago, helping it overtake India as the world's biggest consumer of the yellow metal.

The government has already moved to discourage gold imports as heavy gold imports contribute to a spike in its current account deficit, which is likely to be 3.6 percent of GDP in 2011/12, compared with 2.7 percent in 2010/11.

A demand for dollars to buy gold also weakened the Indian rupee by nearly 16 percent in 2011. The restricted currency has since rebounded.

The government increased import duty on gold to 2 percent of value from the earlier flat 300 rupees per 10 grams, and that of silver to 6 percent of value from the earlier 1,500 rupees per kg.

Demand in India might be sluggish in the first half of the year. The change of import duty does not have much impact on the imports at this point, said Nick Trevethan, senior commodity strategist at ANZ in Singapore.

DIVERSIFICATION

A little less than half of India's gold imports are seen as used for investment purposes.

Surging capital inflows, booming stock markets and a fast-appreciating currency, term deposits, which command a majority share in the savings basket, have been offering more than 10 percent rate of interest, taking away investments from gold.

People are in diversifying mode. Equity markets, which were trading below its book value, is looking attractive. Liquidity is going back to banks, which is giving 10 percent interest, said Prithviraj Kothari, president of Bombay Bullion Association.

Kothari expects investment demand continuing to slow, with a 50 percent drop in demand in the March quarter to 120 tonnes. In 2011, investment demand for gold was 352.1 tonnes.

Investments into gold Exchange Traded Funds (ETF) too are slowing.

Asset under Management in gold ETF at Goldman Sachs, India's biggest gold fund house, grew at a slower pace of 18 percent in December quarter compared to 26 percent in September quarter.

India's jewellery demand in the December quarter fell 47 percent to 103 tonnes, while investment demand fell 38 percent to 70 tonnes in the same period.

Gold Gold prices China Gdp