India’s merchandise trade deficit widened marginally to USD 23.0 bn in Jan-25 from USD 21.9 bn in Dec-24. This was owing to a higher sequential correction in exports via-a-vis imports.

Merchandise Exports

Merchandise exports slipped to USD 36.4 bn at the start of the CY from USD 38.0 bn (-4.2% MoM and -2.4% YoY) in Dec-24. 

1. Of the 14 key sub-categories of exports, 12 registered annual expansion. 
2. Best performance was seen in Electronic items yet again (79.0% YoY) followed by Plantation products (40.6%YoY), Agriculture and allied products (22.4%YoY) and Gems and jewellery (15.9%YoY) 
3. In contrast, the drag on exports was led by Ores and minerals (-33.5%YoY), along with Petroleum products (-58.7%YoY)
4. In value terms, electronic exports at USD 4.1 bn in Jan-25, marked a record high on monthly basis. 
5. Core merchandise exports (i.e., exports excluding Petroleum and Gems & Jewellery) eased to USD 29.9 bn in Jan-25 from USD 31.0 bn in Dec-24, clocking a sequential de-growth of 3.5%MoM primarily led by Machinery goods.

Merchandise Import

Merchandise Imports moderated a tad to USD 59.4 bn in Jan-25 from USD 60.0 bn (-0.9% MoM and +10.3% YoY) in Dec-24 

1. At a granular level, 13 out of 15 key import sub-categories registered annualized expansion. 
2. Strongest growth was clocked by Textiles (76.0% YoY), followed by Chemicals (48.1% YoY), Agri and allied products (37.5% YoY) and Leather (36.3% YoY)
3. In contrast, the drag on imports emanated from Project goods (-48.1%) and Petroleum products (-13.5% YoY).
4. Unlike headline imports that showed a decline, core merchandise imports (i.e., imports excluding Petroleum and Gems & Jewellery) rose to USD 43.3 bn in Jan-25 from USD 40.0 bn in Dec-24. On annualized basis, core merchandise imports clocked a growth of 20.3%, the fastest pace in over 2 years. 

Merchandise Trade Balance

1. Sequential widening in the monthly merchandise trade deficit was driven by the Core deficit – which rose by USD 4.0 bn.
   1. Within the Core deficit, the Machinery surplus eased to USD 4.1 bn from USD 5.6 in Dec-24, accompanied by a widening of the trade deficit in Ores & minerals and Miscellaneous items.
2. Non-core deficit eased to USD 11.7 bn in Jan-25 from USD 14.6 bn in Dec-24, as the trade deficit for both - Petroleum as well as Gems & Jewellery underwent a correction.  

Services Trade

The estimate for services trade surplus for Jan-25 is at a record high of USD 20.3 bn, vis-a-vis USD 19.1 bn in Dec-24. Yet again, exports rose on a sequential basis, at a faster clip compared to imports.

On an Apr-Jan FYTD basis, the services trade surplus has continued to grow at a healthy pace of 14.2 %YoY, only a tad lower vs 16.1% over the corresponding period in FY24. Services exports have remained resilient, benefitting from the continuing strength in the US economy along with the proliferation of Global Capability Centres that have helped to diversify exports beyond traditional IT services.

Outlook

For FY25, we continue to hold on to our current account deficit estimate of 1.3% of GDP. However, we attach a possibility of downside to this estimate amidst the recent revision in data on account of computational discrepancy as well as the strength in services trade surplus.

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 onwards. It is comforting to note that India and the US have displayed camaraderie in the latest top-level interactions, 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) by as early as the fall of 2025. As such, trade remains a developing story on watch especially with respect to India’s negotiations with respect to reciprocal tariffs in the very near term. For now, we hold on to our FY26 current account deficit estimate of 1.3% of GDP with a wide range of risk factors attached on both sides.

Rupee outlook

The Indian rupee started the calendar year 2025 on a sombre note by extending the weakness seen in the last quarter of 2024. The rupee closed Jan-25 at a fresh low of 86.64 vs. the US dollar, thereby registering its second consecutive more than 1% monthly depreciation. Subdued sentiment on the rupee continues to persist, with the currency breaching the 87.5 level earlier in Feb-25. However, since then the currency has a made a strong comeback, aided by RBI’s interventions.

As far as the RBI is concerned, there now appears to be a somewhat greater tolerance for INR flexibility. While prima facie it would be difficult to ascribe a cause for the change in the central bank’s reaction function towards exchange rate management, a gradual build-up in INR overvaluation over last 3-quarters, decline in RBI’s FX import cover due to sizeable intervention since Oct-24, and a need for currency adjustment in a new global trade order could be possible reasons towards the same.

We continue to hold on to USDINR call of 87.00 levels by Mar-25, while acknowledging that the near-term trajectory could potentially see above normal volatility on account of known-unknown risks. While we have an end FY26 USDINR forecast at 89.50, upside risks have strengthened post RBI’s monetary policy easing and greater tolerance for a weaker currency, as also uncertainty with respect to reciprocal tariff peaks.

Having said, we acknowledge that forecasting currency in an environment of known-unknown (like threat to global trade) as well as unknown-unknown risks (geopolitics) is fraught with challenges since there can be phases of overshooting/undershooting vis-à-vis equilibrium levels.

Says Suman Chowdhury, Chief Economist and Executive Director, Acuité Ratings & Research “The global trade landscape has been experiencing intense turbulence since the takeover of the new US administration and the announcement of reciprocal tariffs. The resilience of the Indian Rupee has been severely tested amidst a strong USD and consistently high capital outflows. Nevertheless, Indian non-oil exports have grown at 7.9% YoY in the Apr-Jan’2025 period particularly driven by electronic products and a pickup in agricultural exports. With a 32% surge in gold imports which has almost touched USD 50 bn in the first ten months of the fiscal, the overall deficit would have been higher had it not been for the growth in net services exports. The latter has seen an estimated growth of 25.7% YoY in Jan’2025, driven by consistent rise in the investments in Global Capability Centres (GCCs). While the trade outlook will remain challenging, the healthy growth outlook for services exports will continue to be a comfort factor. We expect the CAD to remain at 1.3% for FY25 but the capital flow volatility will continue to keep the INR under significant pressure.”

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: India Services Exports (Net)