Gold demand improves as strong rupee knocks prices

Gold biscuits are displayed inside a jewellery showroom in Hyderabad April 11, 2012.

MUMBAI (Reuters) - Gold demand in India, the world's top consumer, rose on Monday after prices fell to their lowest level in more than two weeks following a drop in the world market and on a strong rupee, luring jewellers replenishing inventory for festivals.

The most-traded gold contract for October delivery was down 0.58 percent at 31,324 rupees per 10 grams by 3:59 p.m, after falling to 31,272 rupees earlier in the day. It had hit a record high of 32,421 rupees earlier this month.

"The sharp rise in the rupee in a week is supporting demand. Jewellers and investors are back in the market," said a Mumbai-based dealer with a private bank.

"Demand will rise further, if prices fall below 31,000 rupees."

Spot gold prices in the world market pulled back from a near seven-month high on Monday, but a recent spate of stimulus measures from central banks that has buoyed bullion is expected to continue supporting prices.

The rupee, which determines the landed cost of the dollar-quoted yellow metal, rose to a four-month high on Monday.

India will celebrate Dussehra in October and Diwali in November, when buying gold is considered auspicious.

Gold demand traditionally rises in the last quarter of the year in India and China, the world's top two gold consumers, as consumers buy gold for festival celebrations and weddings that typically take place during this season.

(Reporting by Rajendra Jadhav; Editing by Subhranshu Sahu)