Indian gold eased from its highest level in a week on Tuesday in line with global markets, triggering bargain buying by physical traders waiting to stock up for the wedding season.
India, the biggest buyer of gold, has been trying to limit imports to keep a lid on record current account deficit, and the economic advisory council expects the country to import $45 billion tonnes of the yellow metal in the year to March 2014.
At 3:23 p.m., the actively traded gold for June delivery on the Multi Commodity Exchange (MCX) was 136 rupees lower at 26,229 rupees per 10 grams after hitting a high of 26,448 rupees on Monday.
Overseas gold dropped more than 1 percent, as investors in exchange-traded funds continued to liquidate positions, while a stronger dollar also weighed on prices.
A weaker rupee, however, kept the price drop limited. The rupee plays an important role in determining the landed cost of the dollar-quoted yellow metal.
"Demand is crazy here. What we hear from clients is that customers are flocking to showrooms," said a dealer with a foreign bank importing bullion.
Gold premiums in India rose sharply to up to $10 an ounce on London prices, the level last seen in 2010.
"Everyone wants material today. People are ready to pay anything for today's delivery, but there's lag of 8-10 days," said the dealer.
India will celebrate Akshaya Tritiya festival next month, a time considered auspicious to buy gold. Also, the wedding season continues until July.
Silver was down, taking cues from the yellow metal.
Silver for May delivery on the MCX was 986 rupees lower at 42,701 rupees per kilogram.