India current account deficit narrows sharply

India's demand for gold has affected its current account deficit

India's current account deficit, a key area of concern, narrowed sharply in the second quarter after a series of measures helped curb gold imports.

The deficit fell to $5.2bn during the July-to-September quarter, down from $21bn during the same period last year.

A current account deficit is the difference between inflow and outflow of foreign currency and occurs when imports are greater than exports.

India's deficit had been widening raising fears over its economic health.

India's Finance Minister, P Chidambaram, said the latest numbers indicated that the country was "on target to contain the current account deficit".

According to India's central bank, the Reserve Bank of India (RBI), the current account deficit stood at 1.2% of the gross domestic product (GDP) during the quarter, down from 5% of GDP during the same period last year.

Gold imports

India has been trying to bring down the deficit after it hit a record high of 6.7% of the GDP in the October-to-December quarter last year.

A widening deficit strains the country's foreign exchange reserves, as well as the value of its currency.

The Indian rupee has been one of the worst performing currencies in Asia this year.

It fell nearly 25% against the US dollar between January and September this year. Though the rupee has recovered a little since then, it is still down about 13% against the dollar since the start of this year.

In an attempt to rein in the current account deficit and help boost the currency, India's central bank has unveiled a series of measures over the past few months.

These include raising import duty on gold imports - one of the biggest contributor to the deficit.

The Reserve Bank of India said that gold imports dipped significantly during the second quarter, while a pick up in exports also helped to shrink the deficit.

Gold imports amounted to $3.9bn during the quarter, down from $16.4bn in the previous three months.

The data comes just days after India reported that its economy grew by a better-than-expected annual rate of 4.8% in the second quarter.

"The numbers are corroborating the perception that things are on the mend and some big risks like current account deficit are no more," said Abheek Barua, chief economist at HDFC Bank.