March 6 (Bloomberg) — India’s current-account deficit narrowed to a fresh four-year low as gold imports cooled, offering a potential boost for the rupee even as economists said the gap may widen again if the economy improves.

The deficit was $4.2 billion in October through December, compared with $5.2 billion for the prior quarter, the Reserve Bank of India said in a statement in Mumbai yesterday. The shortfall was equivalent to 0.9 percent of gross domestic product. The current account is the broadest measure of trade, tracking goods, services and investment income.

The government increased taxes on gold imports in the world’s second-biggest user of the metal three times last year to help pare a trade imbalance that has weighed on the rupee. The currency has gained about 11 percent since reaching an all-time low on Aug. 28, the world’s best performer in that time, as imports have fallen and growth remains subdued.

“It has come down for all the wrong reasons — if the economy picks up, imports will rise and you’ll see the current-account deficit go up again,” said Dharmakirti Joshi, chief economist with Mumbai-based Crisil Ltd. The government should start to withdraw restrictions on gold imports, he said.

The rupee strengthened 0.5 percent to 61.44 per dollar as of 9:07 a.m. in Mumbai. The S&P BSE Sensex index rose 0.3 percent. The data were released yesterday after markets had closed.

The October-December deficit is the least in data going back to 2010, which are calculated using the latest applicable International Monetary Fund guidelines.

Gold Imports

Finance Minister Palaniappan Chidambaram said yesterday that curbs on gold imports would only be revisited after current-account data for the full fiscal year ending March 31 are released. In a budget speech last month, he said the gap would be $45 billion for the financial year, compared with a record of $88 billion in the previous year.

The narrower shortfall last quarter was driven by a decline in the trade deficit as merchandise exports picked up and imports moderated, particularly gold purchases, the RBI said. The current-account deficit from April to December narrowed to $31.1 billion, compared with $69.8 billion a year ago, the RBI said yesterday.

India’s current-account deficit will probably narrow to about $35 billion, or 1.9 percent of GDP, in the year ending March 31, Morgan Stanley economist Chetan Ahya wrote in a note after the data were released, citing continued improvement in the first nine months of the financial year.

The trade shortfall shrank to $9.91 billion in January from $10.1 billion the previous month. Exports rose 3.8 percent and imports fell 18 percent, the biggest drop since September.

Elections Loom

India’s economic growth slowed last quarter, holding below 5 percent and denting the Congress party’s chances of extending its decade-long rule in national elections that will conclude on May 16. Prime Minister Manmohan Singh’s government forecasts the economy will expand 4.9 percent in the fiscal year ending March 31, compared with a decade-low 4.5 percent in the previous year.

There was net accretion of $19.1 billion to India’s foreign exchange reserves in the three months ending Dec. 31, versus a drawdown of $10.4 billion in the preceding quarter, the RBI said.

After taking over at the RBI in September, Governor Raghuram Rajan raised $34 billion by offering concessional dollar-swaps for lenders to spur inflows and support the rupee. He has raised India’s benchmark interest rate by 75 basis points to 8 percent to fight consumer-price inflation of almost 9 percent, the highest in a basket of 18 Asia-Pacific economies tracked by Bloomberg.

To contact the reporter on this story: Kartikay Mehrotra in New Delhi at kmehrotra2@bloomberg.net

To contact the editor responsible for this story: Daniel Ten Kate at dtenkate@bloomberg.net