BOMBAY, Aug 6 (Reuters) - The worst drought in a decade could hit demandfor edible oil during the festival season in India, the world's largestimporter, traders said on Tuesday.They said while the country was expected to buy more oils in Augustcompared with the previous month, imports would be much lower than at thesame time in the previous year.Traders said domestic demand would be lower, mainly due to a dry spell inmany parts of the country. The June-September monsoon rains have resumedafter a break but not enough to reverse the impact of the drought, theysaid."The drought has soured the appetite for oils," said an edible oil trader,based in the western city of Ahmedabad, adding the festival season waslikely to be a low key affair this time.Traders said India was likely to import 450,000-500,000 tonnes of oils inAugust, up from about 425,000 tonnes in July, but down from 655,000 tonnesin August last year.They said the demand in September and October was also expected to besubdued. Harvests for the winter oilseeds crop begin in late October.Domestic oil consumption normally rises during the Hindu festival seasonwhich starts in mid-August and peaks in early November with Diwali -- thefestival of lights.The monsoon rains arrived over the southern state of Kerala in early Juneand moved to the western parts of the country, but its progress innorthwestern India has been erratic.Several crops including oilseeds and grains in the key growing states havebeen hit by lack of rain and 12 states have so far declared either part orall of their territory drought-affected.Economists say the drought may cut deeper into growth than previousmonsoon failures due to the economy's growing reliance on spending byrural consumers.The monsoon, which has so far delivered 30 percent less rain that normal,is vital to the country's economy as agriculture makes up about 25 percentof gross domestic product (GDP) and employs about 70 percent of its morethan one billion people.

OIL DEMAND

"Local demand was quite dull in July," said an oil trader, based in thecentral Indore city, hub of the country's soy trade. Retail demand wouldpick up after a couple of weeks with the beginning of festivals, he said.Good rains were reported in the past few days in the soybean growing beltof Madhya Pradesh, but showers in the groundnut producing state of Gujaratwere not sufficient to revive the crop prospect, traders said.Traders said fresh import contracts would be signed in the coming weekswith a fall in local inventories. They estimated edible oil stocks ofabout 225,000 tonnes at ports.India imports nearly half of its annual oil requirement of about 10million tonnes from countries such as Malaysia, Indonesia, Brazil,Argentina and the United States.Malaysian palm oil futures were higher across the board at midday onTuesday, but trade was light, with few taking positions in a market facingbearish factors such as improved crop prospects for Indian and U.S.rivals.The benchmark third-month October contract ended the morning session 14ringgit up at 1,466 ringgit ($386) a tonne.Poor rains could lower oilseed output by 10 to 15 percent in the currentwinter season from about 12 million tonnes a year earlier, traders said.India annually produces over five million tonnes each of groundnut andsoybean in the winter season, sown mainly in June-July in the westernstate of Gujarat, central Madhya Pradesh and the southern state of AndhraPradesh.

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