New Delhi: Good tidings greeted the new government on Monday, with data released by the Reserve Bank of India (RBI) showing that India’s current account deficit narrowed sharply in the three months ended 31 March, significantly easing pressure on the external sector.

The current account deficit, or the sum of the balance of trade and invisibles such as remittances and software earnings, fell to $1.2 billion, or 0.2% of gross domestic product (GDP), in the fiscal fourth quarter, from $18.1 billion, or 3.6% of GDP, in the year-ago period.

For the full year to 31 March, the deficit was 1.7 % of GDP, compared with a record-high 4.7% of GDP in the previous fiscal year.

The favourable balance of payment (BoP) numbers were mainly on account of declining imports, led by a steep fall in gold purchases.

In one of the first steps towards easing restrictions on gold imports, RBI on 21 May allowed large private gold importers to import the yellow metal.

“The improvement in the external sector means that it is one major worry less for the new government. The government can now focus on fiscal correction even as it may get some more headroom to increase expenditure," said Rajesh Chakrabarti, executive director at Bharti Institute of Public Policy.

“A lower current account deficit will also contribute to the stability of the rupee," said Chakrabarti, who is also a member of the faculty at the Mohali campus of the Indian School of Business.

The Indian rupee closed at 58.715 per dollar on Monday, down 0.35% from its previous close of 58.5075. After falling to record low of 68.85 per dollar in August, the Indian rupee has recovered, aided by dollar inflows and measures to curb gold imports that have compressed the current account deficit. Since January, the Indian currency has risen 5.25% against the dollar.

In the March quarter, imports declined at a faster pace than exports, which helped in narrowing the trade deficit to $30.7 billion. Merchandise exports fell 1.3% to $83.7 billion and imports declined 12.3% to $114.3 billion.

Gold imports dropped to $5.3 billion in the quarter from $15.8 billion in the year-earlier period. The government has in the past one-and-a-half years progressively raised the import duty on gold to 10% to control the spiralling current account deficit and ease pressure on the rupee. The central bank also put curbs on bank loans against gold coins.

Net service receipts rose 15.6% to $19.6 billion in the March quarter. While net portfolio inflows were at $ 9.3 billion, net foreign direct investment (FDI) flows were lower at $0.9 billion. Capital inflows were sufficient to meet the deficit and there was a net accretion of $7.1 billion to India’s foreign exchange reserves in the quarter, the central bank said.

A revival in domestic consumption or investment would boost growth of non-oil, non-gold imports in the second half of 2014-15 and could increase the current account deficit to $40-45 billion in the current fiscal year even if restrictions on gold imports continue, Aditi Nayar, a senior economist at rating agency Icra Ltd, wrote in a research note.

“A strengthening of global growth impulses would support services and merchandise exports in FY15 (fiscal year 2015). However, elevated inflation is likely to erode the competitiveness of Indian exports, particularly if improved sentiments result in a sustained appreciation of the INR (rupee)," she wrote.

If restrictions on gold imports are eased, the current account deficit could increase by an additional $10-15 billion, she added.

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