The current account deficit declined to 0.9% of gross domestic product in the second quarter of the fiscal year ending March 2020 from 2.9% in the same period a year ago. On a quarterly basis, it shrank from 2.0% of GDP in the June quarter.
The deficit measures the difference between the value of a country's imported and exported goods and services.
"The contraction ... was primarily on account of a lower trade deficit at $38.1 billion as compared with $50.0 billion a year ago," the Reserve Bank of India said in the release.
The trade deficit stood at $12.12 billion in November compared with $16.67 billion a year earlier, trade ministry data showed earlier this month.
The "trade deficit is lower primarily because imports have fallen at a faster rate than exports due to weak manufacturing activity and lower imports of raw materials and capital goods," said Rupa Rege Nitsure, chief economist at L&T Financial Services.
Data last month showed annual economic growth slowed to 4.5% in the September quarter, its weakest pace since 2013.
The current account deficit stood at $6.3 billion in the September quarter versus $19 billion a year ago. The merchandise trade deficit narrowed to $38.1 billion from $50.0 billion, the central bank said.
Balance of payments, the difference between the current account and capital account, stood at a surplus of $5.1 billion in the September quarter compared with a deficit of $1.9 billion a year ago, data showed. However, the narrowed from $14 billion seen in the June quarter.
Net inflow on account of external commercial borrowings stood at $3.2 billion compared with $2.0 billion last year. Net foreign direct investment was largely unchanged at $7.4 billion.
Private transfer receipts, mainly representing remittances by Indians employed overseas, rose to $21.9 billion, up 5.2% from a year ago, the data showed.
"Both the critical components of foreign exchange reserves - exports and FDI - have not shown any improvement Y-O-Y. On the other hand, portfolio inflows (hot money) and ECBs (debt capital) have increased significantly. This kind of improvement is not sustainable," L&T's Nitsure said.