Trade deficit narrowed to an 11-month low in January, helped by a plunge in global oil prices, bolstering the outlook for India's current account balance as well as the rupee.
But in a worrying sign, weak global demand led to a second straight annual fall in merchandise exports. Exports account for nearly a fifth of India's $2 trillion economy.
The trade deficit shrank to $8.32 billion in January, its lowest since February 2014, from $9.43 billion a month earlier.
Falling global crude prices brought down the cost of oil imports to $8.25 billion, down 17 percent from December. Year-on-year oil imports fell by nearly 38 percent.
Oil accounts for nearly a third of India's imports. Global crude prices have plunged more than half since last June, promising windfall gains for Asia's third-largest economy.
Analysts reckon every $10 fall in the price of a barrel of oil narrows India's current account gap by 0.5 percent of GDP and reduces the fiscal deficit by 0.1 percent.
A lower external deficit would also buoy the rupee, amid signs of increasing volatility in emerging-market currencies in anticipation of higher interest rates in the United States.
The oil rout has led to a sharp fall in pump prices for petrol and diesel, helping cool inflation and boost personal disposable income.
India's retail inflation accelerated to 5.11 percent in January after shifting to a new base year for calculating prices, data showed on Wednesday, but stayed well below the central bank's medium-term target of 6 percent, bolstering prospects for further interest rate cuts.
"The smaller trade deficit provides the central bank with further scope to loosen policy again over the coming months," said Shilan Shah, India Economist at Capital Economics.
The Reserve Bank of India is widely expected to resume its monetary easing after Finance Minister Arun Jaitley presents his annual budget on Feb. 28.
It kept its policy repo rate unchanged at 7.75 percent early this month after surprising investors in January with the first interest rate cut in 20 months.
Merchandise exports were down 11.19 percent year-on-year at $23.88 billion.Suggest a correction