India posted a current account deficit of $3.4 billion, or 0.6 percent of gross domestic product, in the July-September quarter, wider than the $300 million or 0.1 percent of GDP posted in the previous quarter.
But it compares with a deficit of $8.5 billion, or 1.7 percent of GDP, posted in July-September last year, and is likely to comfort investors as emerging markets face a period of uncertainty due to expected rate hikes by the U.S. Federal Reserve.
India also said the balance of payments was at a surplus of $8.5 billion, compared with a deficit of $900 million a year ago.
"Core imports increased sharply in July-September, pushing the deficit higher, to still comfortable levels," said Abhishek Upadyay, economist at ICICI Securities Primary Dealership.
"Current account deficit for the entire fiscal will be closer to 0.5 percent of GDP, which can be funded easily via stable flows such as foreign direct investments."
Although India has not been immune to foreign investor selling since the election of Donald Trump as U.S. president sparked a shift of flows from emerging markets into the United States, analysts believe the country is among the better placed in emerging markets.
BANK NOTE REFORM
Gross domestic product is also growing at the fastest pace among large economies, though analysts fear India will suffer from its unexpected move to ditch higher-valued bank notes.
India's improved standing contrasts with 2013, when fears of Fed tightening sparked a sell-off in emerging markets that hit the country hard, sparking its worst currency crisis in more than two decades.
But risks remain to the current account deficit if the country's demonetisation hits economic growth more than expected, sparking more potential foreign investor outflows, though that could be offset by reduced imports.
"If oil prices don't rise sharply, imports will remain under control and that will help the current account deficit to also remain near zero percent of GDP," said an analyst with a private bank who asked not to be named.
Dollar outflows stood at $4.7 billion in November and this month so far total $2.3 billion.
Outflows could also hit the rupee, which briefly touched a record low of 68.8650 last month, and is expected to weaken more as it remains about 11 percent over-valued in real effective exchange rate terms compared to its trading partners.