Gold prices soared by Rs 340 to hit an over two-month high of Rs 26,690 per 10 grams on Wednesday, tracking the strength in metal prices in overseas markets.
The rally in precious metal prices was also led by a fall in rupee to 68 against the US dollar, as a cheaper rupee makes the metal imports costlier.
In the overseas markets, the yellow metal prices rallied towards $1,100 an ounce due to increased demand for its safe-haven status. Investors rush to buy gold whenever there is sharp sell-off in global markets.
"Gold's safe haven rationale is back in vogue," Citigroup analysts told Reuters. "While geopolitical issues typically tend to be short-lived in terms of lending support to gold prices, we expect ongoing global macro concerns to lend support this quarter."
Gold prices also got a boost from the IMF's bleak outlook about the global economy. In a report on Tuesday, the Fund cut its 2016 global growth outlook to 3.4% from an earlier estimate of 3.6%. The IMF cited slowdown in China and a slump in commodity prices as main reasons for revising down its growth forecast.
Falling crude oil prices, which led to a sell-off in Asian stock markets, also supported the gold prices. Brent crude oil prices fell to $28 a barrel on the worries over imminent resumption in oil supply from Iran.
"One of the contributing factors was no doubt the extremely bearish comments made by the International Energy Agency about the situation on the oil market. According to the IEA, a combination of unusually warm temperatures and increasing supply from Iran could mean that the oil market remains oversupplied until at least the end of 2016 and that prices could slide even further," said Commerzbank Corporates & Markets in a note.
Domestic stock markets ended sharply lower following a further decline in oil prices, with the benchmark indices hitting a fresh 20-month low.
Silver prices were also supported by a weakness in equities and the metal prices closed Rs 34,400 per kg, up Rs 400.