Is India going back to bullion?

Is India ready to curb gold controls?

India's trade deficit narrowed in January, thanks to the country's strict import controls on gold imports. But analysts are warning that even though the figures are less alarming, now is not the time to let bullion back in.

The Reserve Bank of India (RBI) imposed tough rules on gold imports last year in an attempt to tackle the country's crippling current account deficit.

India was among many of the emerging markets that saw their currencies get battered when the U.S. Federal Reserve first floated the idea of tapering its quantitative easing program last summer.

The country's record current account deficit, which showed a $87.8 billion shortfall, in the previous fiscal year to March 2013, had caused the Indian currency's dramatic fall.

To correct the rupee's fall , and improve the country's balance of trade, RBI governor Raghuram Rajan imposed import controls on gold. And it looks as though it has worked: Figures from the Indian trade ministry on Tuesday showed that the trade deficit fell from $10.14 billion in December to $9.92 billion last month, helped by a 77 percent fall in gold and silver imports.

(Read more: India's economy is out of the woods: ICICI CEO)

Analysts are predicting that could ease the gold import restrictions after the positive trade data.

"India is a huge importer of gold. At a retail level, Indians love gold," Rajiv Biswas, senior director and Asia-Pacific chief economist at IHS Global, told CNBC in a TV interview.

"I think there are signs of progress with reducing the trade and current account deficits in India and knowing that it's very hard to restrict this demand indefinitely, they probably feel it's time to start easing back on the controls."

Biswas said however that the RBI would not completely ax the restrictions, but ease them slowly.

Dhiraj Singh | Bloomberg | Getty Images

The RBI is expecting to review their import policy towards the end of March, but was not able to respond for a comment.

'Rash move'

The debate in India over whether the import restrictions should be eased has been raging on. Last month, India's Congress party chief Sonia Gandhi asked the government to review the policy while the country's jewellery industry is calling for a cut in the 10 percent import duty on gold, which they claim is hurting their business.

(Read more: Raghuram Rajan: India's deficit is under control)

India's Finance Minister, Palaniappan Chidambaram told CNBC in Davos last month that the country will not rollback its gold import rules.

However, the gold import restrictions have largely helped keep the rupee stable amid the latest emerging market currency sell-off and any reversal of the rules would be a "rash" move, according to Mark Williams, chief Asia economist at Capital Economics.

"I still expect them to stick with the controls at least for the time being, but a reversal of those controls would run a high risk of signalling run off on rupee," Williams told CNBC in a phone interview.

Move on gold price?

The gold price plummeted 28 percent in 2013 as the global economy improved. If the import restrictions in India were to be lifted, there is no guarantee that the price would see an uplift, despite strong demand for the precious metal.

(Read more: India lifts interest rates, says further tightening unlikelysoon)

"The gold price had collapsed prior to India bringing down the shutters in July and the price went sideways in the back half. The Indian trade restrictions didn't do anything," Adrian Ash, head of research at BullionVault, said in a phone interview.

"The fact is that the price of the margin is still set by western investment demand."

—By CNBC's Arjun Kharpal: Follow him on Twitter @ArjunKharpal