Diamonds may be forever, but the hardest known natural material seems to be losing its famed allure.

The domestic industry, which in 2009 suffered its worst downturn, fears sales will decline 10-15 per cent in domestic as well as international markets this festive season.

The erosion of rupee value against the dollar and sluggish demand from key foreign markets are cited as the main reasons for declining sales.

The overseas demand is low due to fears of a double-dip recession in the US and the sovereign debt crisis in Europe.

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The dollar has gained almost 10 per cent against the rupee in the past two months.

The rupee has fallen from Rs 44 a dollar in August to Rs 49, the sharpest fall since the Lehman Brothers crisis in early 2009.

Also, the cost of dollar-quoted imported diamonds has risen due to an appreciation in the US currency, while low demand is prompting sellers to reduce prices of polished diamonds to recover investments.

The industry has witnessed a roller-coaster ride so far this year. Rough diamond prices have increased by 30 per cent in the past few months, hitting peak levels of about $230 per carat in September.

This prompted diamantaires to raise prices of polished diamonds as well. "There is a dullness among diamond players.

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"Global factors are hampering sales prospects. It is feared diamond sales may dip by at least 10 per cent this festive season, owing to uncertainty in the market," said Champak Mehta, managing director of C Mahendra Exports.

"But there is no need to panic. We are not entering a recession, but the non-branded segment of jewellery and diamonds would face problems."

The weak rupee, largely due to the high inflation in the domestic economy and debt worries of the euro zone and the US, also pushed up the cost of imported rough diamonds.

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"There is uncertainty in the (diamond) market and this festive season may not be a fantastic one for diamond players.

"We cannot rule out the possibility of a decline in sales against that in last year, but those who have set aside a budget for diamond purchases would certainly buy diamonds. So, more or less, the demand would be there," said Tehmasp Printer, managing director, IGI India.

According to the Gems and Jewellery Export Promotion Council, India exported polished diamonds worth Rs 11,047 crore (Rs 110.47 billion) in September 2010 and Rs 10,742 crore (Rs 107.42 billion) this August.

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"So far, we have not received any cancellation of orders, but we are concerned about the slowdown in major economies.

Exports of gems and jewellery may grow at 15-16 per cent to $48-49 million this financial year. We are also looking at new destinations like Latin America and African and CIS countries," said Rajiv Jain, chairman, GJEPC. Industry experts are banking on retail buying to give some psychological boost to diamantaires.

The industry hints at a rather flat growth for September sales of polished diamonds.

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"The retailers are pretty geared up. During May-June, we witnessed good demand from domestic and international markets. For this festive season, we have executed initial orders and now, waiting for the repeat orders to come for Diwali and Christmas.

"The diamond industry would not show any 'degrowth', in spite of the current global uncertainties," said Aagam Sanghavi, director of Sanghavi Exports.

About 35-40 per cent of initial sales till September is expected to generate repeat orders. He said exporters would not be affected because of currency fluctuations, as they kept inventories in dollars, which safeguarded them from a decline in the rupee.

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Meanwhile, the diamond industry in Surat, the world's largest diamond polishing hub, is taking every decision cautiously.

"Diamond manufacturers, traders and importers are all scared of the current global financial situation.

"Most diamantaires have adopted a 'wait-and-watch' strategy till the markets show some signs of stability," said Dinesh Navadia, president of the Surat Diamond Association.

As a fallout of the market uncertainty and reduced demand prospects, diamantaires from Surat are considering to extend their Diwali vacation by a month from the usual 20 days.

The extended vacation is believed to help diamantaires to reduce their losses from selling diamonds at lower rates in the absence of demand.