The country's current account deficit fell to 2.6% of the Gross Domestic Product in 2010-11, from 2.8% in the previous fiscal, the government said today.
"The current account deficit (CAD) was 2.8% of GDP in 2009-10 and 2.6% in 2010-11, while the capital account surplus was 3.9% in 2009-10 and 3.5% in 2010-11," Minister of State for Finance Namo Narain Meena said in a written reply to the Lok Sabha.
While CAD represents the difference in inflows and outflows of foreign exchange of a country, the current account surplus happens when investment from the country in foreign assets is greater than investment from abroad in domestic assets.
"The capital account surplus was, therefore, essentially financing the CAD," the minister said.
Meena said that intervention by the Reserve Bank of India in the foreign exchange market has also been minimal in recent months.
"Hence, capital flows are not a challenge for the forex and monetary policy management," the minister said.
The government is targeting to bring down the CAD in 2011-12 to below the last fiscal's mark.
In reply to another question, Meena said the recent global developments have impacted the Indian capital markets.
"The uncertainty in the global markets due to recent developments in the US and Eurozone have had some impact on capital markets in India. The Indian growth story, however, is expected to remain largely intact as its fundamentals are strong," he said.
The minister said that India's economy was mainly driven by domestic consumption as 85% of the country's GDP comes from economic activity within the economy.
"The calibrated approach to capital account convertibility has prevented surge and reversal of debt creating capital flows. Indian banking sector is robust and the export basket is increasingly diversified in terms of products and destinations, with developing economies emerging as the largest export market," Meena said.
He added that the government was keeping a watch on the global developments and any action would depend on how the international situation unfolds.
