The surge in gold buying sent the April trade deficit to $17.8 billion, up more than 72 per cent from March, official data showed, because retail customers in the world's largest gold importer went on a buying spree after a sharp fall in global prices.
The size of the increase came as a shock to the government, which imposed duties on gold imports earlier this year to stem a rising import bill. The attraction of lower prices more than offset the duties.
"The rise in gold imports is surprising. It was not expected," Commerce Secretary S R Rao told reporters.
The Reserve Bank of India (RBI) brought into effect on Monday previously announced restrictions on banks importing gold. A trade ministry official said the April surge had revived discussion in the government of a further duty hike.
Gold and silver imports surged an annual 138 per cent to $7.5 billion after world prices slumped 17 per cent over a period of two weeks in the month. The timing coincided with traditional peak-buying seasons for some states celebrating festivals.
Silver imports usually account for a very small amount of the combined total, which is dominated by gold.
The RBI flagged a high current account deficit earlier this month as the biggest risk "by far" to Asia's third-largest economy even as it cut interest rates by a quarter point for the third time since January.
The current account gap widened to a record high 6.7 per cent of GDP in the December quarter, driven by heavy oil and gold imports and lower exports.
The central bank said the deficit and risks of a resurgence of inflationary pressures constrained room for further policy easing.
Still, some analysts are optimistic of another rate cut by mid-2013 as they expect the trade deficit to narrow with a slowdown in gold demand, while inflation has come down sharply in recent months.
"The surge in gold imports in April could have been due to frontloading of demand given the fall in gold prices, but this demand will come off in the next few months," said Siddhartha Sanyal, India economist, Barclays Capital in Mumbai.
"I don't expect RBI will take any view based on just April trade deficit number," Mr Sanyal said.
Headline prices - as measured by the wholesale price index (WPI) - have been rising at the lowest clip in more than three years, giving some relief both for consumers and the government, which is preparing to face elections within a year.
WPI-based inflation, due on Tuesday around 0630 GMT, probably eased to 5.50 per cent in April, the lowest level since November 2009 and the third consecutive month of cooling price rises, according to a Reuters poll.
Unlike most central banks, the Reserve Bank relies primarily on the WPI to draw up its monetary policy, not the consumer price basket.
Government data showed on Monday that annual retail inflation slowed by a full percentage point to a 14-month low of 9.39 per cent in April, the second consecutive drop. Lower food prices were behind the slowdown, rising 10.61 per cent in April, sharply lower than 12.42 per cent in March.
"Overall, with both headline CPI and WPI moderating and growth still languishing, we expect a cumulative 50 basis points of rate cuts in 2013," Nomura wrote in a note on Monday.
India's growth in 2012-13 was likely the lowest in a decade, and is not expected to much surpass 6 per cent in FY14.
Copyright @ Thomson Reuters 2013