Gold demand surges as prices drop on strong rupee

A shopkeeper shows gold bangles to a customer at a jewellery shop in Mumbai November 4, 2009.

MUMBAI (Reuters) - Gold demand in India, the world's biggest buyer of the precious metal, rose significantly on Monday as a rebound in rupee slashed prices 1 percent ahead of the peak festival season.

The most-active gold for December delivery on the Multi Commodity Exchange was down 0.92 percent at 31,000 rupees per 10 grams by 2:33 p.m., while December silver fell 0.68 percent to 59,430 rupees per kg.

The rupee, which rose more than 0.5 percent on Monday, plays an important role in determining the landed cost of the dollar-quoted yellow metal.

"Buyers are active. They were not expecting correction in prices due to firmness in overseas prices, but strong rupee made it possible. Jewellers are restocking for Diwali," said a Mumbai-based dealer with a state-run bank dealing in bullion.

"Demand will remain healthy if prices stay at current level for some more days," the dealer said.

The festival season, traditionally a time to buy gold, is underway in India and will peak with Dhanteras and Diwali next month. Weddings also take place during this period.

Global gold recovered slightly on Monday as the fall in price attracted buyers.

(Reporting by Rajendra Jadhav; Editing by Jijo Jacob)