I am adding more details to my problem.
I use monospace. I access gvim using xterm via reflectionX (an xterm app). I am attaching two files vim.png and gvim.png generated using the same vimrc and the same xterm. You will immediately see what I mean. Now I know it probably has something to do with guifontwide, but just cannot get the problem solved.
" set fileencodings=latin1 " tried this too but it does not work.
set hlsearch
set cinoptions=:0,p0,t0
set cinwords=if,elsif,else,while,do,for,switch,case,foreach,unless,until
set guifont=Monospace\ 8
"set guifontset=Monospace \8 " tried this too but it does not work
"set guifontwide=Monospace\ 8 " tried this too but it does not work.
VIM - Vi IMproved 7.2 (2008 Aug 9, compiled Feb 17 2012 10:22:22)
Included patches: 1-411
Huge version with GTK2 GUI. Features included (+) or not (-):
+arabic +autocmd +balloon_eval +browse ++builtin_terms +byte_offset +cindent +clientserver
+clipboard +cmdline_compl +cmdline_hist +cmdline_info +comments +cryptv +cscope +cursorshape
+dialog_con_gui +diff +digraphs +dnd -ebcdic +emacs_tags +eval +ex_extra +extra_search
+farsi +file_in_path +find_in_path +float +folding -footer +fork() +gettext -hangul_input
+iconv +insert_expand +jumplist +keymap +langmap +libcall +linebreak +lispindent +listcmds
+localmap +menu +mksession +modify_fname +mouse +mouseshape +mouse_dec +mouse_gpm
-mouse_jsbterm +mouse_netterm -mouse_sysmouse +mouse_xterm +multi_byte +multi_lang -mzscheme
+netbeans_intg -osfiletype +path_extra +perl +postscript +printer +profile +python
+quickfix +reltime +rightleft -ruby +scrollbind +signs +smartindent -sniff +startuptime
+statusline -sun_workshop +syntax +tag_binary +tag_old_static -tag_any_white -tcl +terminfo
+termresponse +textobjects +title +toolbar +user_commands +vertsplit +virtualedit +visual
+visualextra +viminfo +vreplace +wildignore +wildmenu +windows +writebackup +X11 -xfontset
+xim +xsmp_interact +xterm_clipboard -xterm_save
system vimrc file: "/etc/vimrc"
user vimrc file: "$HOME/.vimrc"
user exrc file: "$HOME/.exrc"
system gvimrc file: "/etc/gvimrc"
user gvimrc file: "$HOME/.gvimrc"
system menu file: "$VIMRUNTIME/menu.vim"
fall-back for $VIM: "/usr/share/vim"
Compilation: gcc -c -I. -Iproto -DHAVE_CONFIG_H -DFEAT_GUI_GTK -I/usr/include/gtk-2.0 -I/usr
/lib64/gtk-2.0/include -I/usr/include/atk-1.0 -I/usr/include/cairo -I/usr/include/pango-1.0 -
I/usr/include/glib-2.0 -I/usr/lib64/glib-2.0/include -I/usr/include/pixman-1 -I/usr/include/f
reetype2 -I/usr/include/libpng12 -O2 -g -pipe -Wall -fexceptions -fstack-protector --par
am=ssp-buffer-size=4 -m64 -mtune=generic -D_GNU_SOURCE -D_FILE_OFFSET_BITS=64 -D_FORTIFY_SOU
RCE=1 -D_REENTRANT -D_GNU_SOURCE -fstack-protector -I/usr/local/include -D_LARGEFILE_SOUR
CE -D_FILE_OFFSET_BITS=64 -I/usr/lib64/perl5/CORE -I/usr/include/python2.6 -pthread
Linking: gcc -Wl,-E -Wl,-rpath,/usr/lib64/perl5/CORE -L/usr/local/lib -o vim -lgtk-x11-
2.0 -lgdk-x11-2.0 -latk-1.0 -lgio-2.0 -lpangoft2-1.0 -lgdk_pixbuf-2.0 -lpangocairo-1.0 -lcair
o -lpango-1.0 -lfreetype -lfontconfig -lgobject-2.0 -lgmodule-2.0 -lglib-2.0 -lXt -lselinux
-lncurses -lacl -lgpm -Wl,-E -Wl,-rpath,/usr/lib64/perl5/CORE -fstack-protector -L/usr/
lib64/perl5/CORE -lperl -lresolv -lutil -lc -L/usr/lib64/python2.6/config -lpython2.6 -lutil
-lm -Xlinker -export-dynamic