Merchandise Exports

Merchandise exports rose to USD 36.9 bn in Feb-25 from USD 36.4 bn (+1.3% MoM and -10.9% YoY) in Jan-25 

1. Of the 14 key sub-categories of exports, only four registered annual expansion.
2. The best performance was seen in Electronic items yet again (26.5% YoY) followed by Plantation products (11.9% YoY), Marine products (3.4% YoY) and Agriculture and allied products (3.2% YoY)
3. In contrast, the drag on exports was led by Petroleum products (-29.2% YoY), Miscellaneous items (-28.2% YoY), Gems and jewellery (-20.7% YoY) and Ores & minerals (-15.2% YoY).
4. Core merchandise exports (i.e., exports excluding Petroleum and Gems & Jewellery) eased to USD 28.6 bn in Feb-25 from USD 29.9 bn in Jan-25, clocking a sequential de-growth of 4.4% MoM led by Machinery and Electronics items. 

Merchandise Imports

Merchandise Imports moderated to a 22-month low of USD 51.0 bn in Feb-25 from USD 59.4 bn (-14.2% MoM and -16.3% YoY) in Jan-25 

1. At a granular level, 9 out of 15 key import sub-categories registered annualised expansion.
2. Strongest growth was clocked by Project goods (359.2% YoY), Textiles (37.1% YoY), Agri and allied products (23.1% YoY), Leather (21.9% YoY) and Chemicals (18.0% YoY)
3. In contrast, the drag on imports emanated from Gems & jewellery (-59.8% YoY), Ore & minerals (-27.0% YoY) and Transport equipment (-16.9% YoY).
4. In line with headline imports, core merchandise imports (i.e., imports excluding Petroleum and Gems & Jewellery) too moderated to USD 35.0 bn in Feb-25 from USD 41.2 bn in Jan-25. On an annualised basis, core merchandise imports clocked a marginal growth of 3.1% in Feb-25.  

Merchandise Trade balance

1. Sequential narrowing in the monthly merchandise trade deficit was driven by both Core (-USD 4.9 bn) as well as Non-core deficit (-USD 3.6 bn)
   1. Within Core items, the deficit eased for Ores & minerals, Electronics and Miscellaneous items predominantly.
   2. Electronics trade deficit narrowed to a 24-month low of USD 3.8 bn
   3. Ores & minerals trade deficit moderated to a 42-month low of USD 2.3 bn.
2. Non-core deficit eased to a 44-month low into single-digits, at USD 7.6 bn compared to USD 11.2 bn in Jan-25. While both the Petroleum as well as Gems & Jewellery deficits corrected, the former led to the decline.

Services Trade

The estimate for services trade surplus for Feb-25 stands at USD 18.5 bn compared to USD 18.0 bn in Jan-25. While exports expanded by 0.9% MoM, imports recorded a correction of a similar magnitude. 

On an Apr-Feb FYTD basis, the services trade surplus has continued to grow at a healthy pace of 15.0% YoY. Services exports have remained resilient, benefitting from the continuing strength in the US economy so far, along with the proliferation of Global Capability Centres in India that have helped to diversify exports beyond the traditional IT services. Having said that, the likely downside to US GDP growth from an aggressive use of tariffs is a potential risk going into FY26. 

Outlook

For FY25, we lower our current account deficit estimate to 0.7% of GDP from 1.2% of GDP, reflecting a downside bias. The favourable Feb-25 print, recent revision in data on account of computational discrepancy as well as the strength in services trade surplus prompts this revision. 

For FY26, a lot on the trade front rides on geopolitics and the evolution of trade flows from here on, especially with the imposition of reciprocal tariffs by the US beginning Apr-25. It is comforting to note that India and the US have displayed camaraderie at PM Modi’s recent visit to the US, promising to strengthen economic ties and enhance bilateral trade, especially in sectors of energy, defence and technology. Specifically, the two nations will be working towards “Mission 500” – aiming to more than double total bilateral trade to USD 500 bn by 2030 and negotiate the first tranche of the multi-sector Bilateral Trade Agreement (BTA) as early as the fall of 2025.  

In the interim, India might be exploring some other ‘quick fixes’, such as – 1) Fixing a certain quantum or quota of its total oil imports for sourcing crude from the US and 2) Identifying a list of items where India is willing to reduce/eliminate tariffs to push a ‘zero for zero’ tariff regime. 

 As such, trade remains a developing story to watch, especially with respect to India’s negotiations with respect to reciprocal tariffs in the very near term. Additionally, Brent prices, which have been benign in the USD 71-72 per barrel range of late, remain on watch for any upside if geopolitics were to escalate. Gold prices, in an environment of global uncertainty, continue to scale record highs. As such, we hold on to our FY26 current account deficit of 1.3% of GDP with a wide range of two-sided risks.

Rupee Outlook 

The US dollar’s initial rally that propelled the DXY index from its pre-election low of 100.4 in Sep-24 to 110.0 in Jan-25 was predicated on the prevailing US economic resilience, which coupled with Trump’s anticipated policy changes, was expected to preserve the narrative of US exceptionalism. 

However, this narrative now appears to be running out of steam, and the USD is facing some headwinds. An authoritarian approach towards the imposition of tariffs is clouding the US economic outlook:

1. Citigroup’s Economic Surprise Index for the US has slipped into negative territory since Feb 20th
2. Although it is still early to conclude, the Atlanta Fed’s GDP forecast for Q1 2025 is currently pointing towards a sharp slide in growth momentum to -2.1%.
3. This has resulted in market participants upping their Fed rate cut expectation to a cumulative 75 bps by December 25 compared to an expectation of 50 bps a few weeks ago. As such, the DXY index has moderated to sub-104 levels currently, i.e., back to levels that existed before the US presidential election in Nov-24.

Although India has not attracted any targeted tariffs yet, overtures from the US administration suggest a strong likelihood of imposition of reciprocal tariffs from April 25. As such, INR has been one of the worst-performing currencies on a CYTD basis, depreciating by 1.2% against the USD. Notably, the CYTD weakness in INR has played out in the backdrop of a 4.7% drop in the DXY index. However, there are a few domestic factors which are also playing a minor role at the same time. 

1. RBI’s FX reserve import cover (for both merchandise and services import) is estimated at 6.2 months in Feb-25, down from its recent peak of 8.2 months in Sep-24.
2. Re-rating of China by FPIs along with sharp sell-off in domestic equities by FPIs.

Having said that, we do note the emergence of a few silver linings. 

1. Indian policymakers are actively engaging with their US counterparts to find a middle path on the issue of rebalancing of tariffs and trade.
2. INR weakness in the last 5 months has narrowed the overvaluation gap from 10.0% in Oct-24 (vs. the REER LPA) to ~4.5% now (estimated for Feb-25). Hence, incremental depreciation pressures should not be excessive, ceteris paribus.
3. Global growth concerns, along with the US’ desire to increase energy output is resulting in a softening in crude oil prices 

Overall, notwithstanding elevated known-unknown risks, we maintain our USDINR call of 87.50 for Mar-25 while expecting further depreciation towards 89.50 before Mar-26.

Below is Acuité Ratings & Research Limited's comment on the Feb 2025 Trade data:

“India’s trade outlook presents a mixed picture. The narrowing trade deficit offers near-term relief, but soft global demand and lower commodity prices may continue to weigh on exports. Core imports show signs of resilience, reflecting some stability in domestic demand, while the services trade surplus is expected to remain strong due to demand.

 However, risks persist from geopolitical tensions and shifts in US economic policy. The external sector’s trajectory in FY26 will hinge on the pace of global recovery and India’s policy measures to navigate these uncertainties in the current tariff war.”

Table 1: Highlights of India’s trade balance*

 *Note: Numbers may not add up due to rounding off and revision in headline exports and imports

Chart 1: Trade balance records a sizeable narrowing in Feb-25, led by correction in imports