The deficit narrowed by 44 percent from the previous month to $9.43 billion, its lowest since February 2014. The cost of oil imports, at $9.94 billion, fell 15 percent from November.
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.
The oil-price slide, estimated by the finance ministry to shave 1 to 1.5 percent off India's current account deficit, was a key factor in making it possible for the Reserve Bank of India to announce a surprise interest rate cut on Thursday.
RBI Governor Raghuram Rajan ordered the quarter-point cut between meetings, in a key boost for Prime Minister Narendra Modi's government as it prepares to present its first full budget next month.
A lower external deficit would also buoy the Indian rupee amid signs of increasing volatility in emerging-market currencies in anticipation of higher interest rates in the United States.
"With lower external vulnerabilities, interest rates do not need to stay as high to continue attracting foreign capital," said Shilan Shah, India Economist at Capital Economics. "This further supports our view that the RBI will follow up today's rate cut with more monetary easing over the coming months."
Gold imports also dropped by 76 percent from the previous month to $1.34 billion. Buyers were deterred by price volatility during the month after a prolonged decline in the value of the precious metal.
In signs of growth worries, weak global demand pulled down merchandise exports to $25.4 billion from nearly $26 billion in the prior month. Year-on-year, exports fell 3.77 percent in December.
Exports account for nearly a fifth of India's $2 trillion economy, which is struggling to break out of its longest spell of sub-par growth since the 1980s.
Copyright: Thomson Reuters 2015