India, the world's largest importer of gold, saw a sharp decline in demand for the first time in five quarters in July-September.

The demand fell 23 per cent year-on-year from 263.9 tonnes to 203.3 tonnes.

This was in variance with the global demand, which went up six per cent. China's demand rose 16 per cent in the same period, according to World Gold Council (WGC) data.

WGC managing director Ajay Mitra said the demand dip in India was understandable, as buyers faced the double whammy of higher prices due to rupee depreciation and high inflation.

"High prices of food articles and fuel, along with higher than expected interest rates on home loans, squeezed customers' investible income."

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Interestingly, while the demand for physical gold went down in the second quarter, derived products like gold exchange-traded funds (ETFs) witnessed a sharp increase.

Gold ETFs and other such products witnessed inflows of 77.6 tonnes in the third quarter of 2011, 58 per cent higher y-o-y.

Corporate demand for gold in the ETF segment has been rising in the past six months. Latest data from the Association of Mutual Funds show companies have invested as much Rs 4,176 crore (Rs 41.76 billion), 51 per cent of the total assets under management of gold ETFs.

According to market experts, high prices and a fall in the rupee against the dollar hurt demand for the yellow metal significantly.

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Gold prices in India went up 18.35 per cent against an international price increase of 8.24 per cent during the September quarter.

As a result, in value terms, the overall demand went up 5.6 per cent to Rs 51,028.3 crore (Rs 510.28 billion) as against Rs 48,354.48 crore (Rs 483.54 billion) in the same quarter last year.

On the other hand, the Chinese yuan appreciated by 1.28 per cent against the dollar during the period.

China is also said to be buying gold as part of diversification of its currency reserves.

The Chinese demand for gold, at 191.2 tonnes, was up 16 per cent. It was almost 100 tonnes less in the third quarter of 2010 at 164.9 tonnes compared to India's 263.9 tonnes.

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There was high volatility in gold prices, as well. According to Naveen Mathur, associate director, Angel Broking, "India's gold demand has fallen in the third quarter of the current calendar year due to high volatility in prices."

The volatility in gold prices was as high as 32 per cent and 33.7 per cent in August and September, respectively, way above the average volatility of 15-25 per cent.

Jewellery demand fell 26 per cent to 125.3 tonnes from 168.4 tonnes while investment demand fell 18 per cent to 78 tonnes from 95.5 tonnes in the same period.

Gold prices today fell Rs 175 to close at Rs 28,965 per 10 grams in Mumbai, following cues from overseas markets.

In London, spot gold declined to trade at $1,745.88 an oz in early evening trade as against $1,763.38 an oz the previous day.