India’s merchandise trade deficit widened significantly at the end of the fiscal year to USD 21.5 bn, from a 42-month low of USD 14.1 bn in Feb-25. This was driven by a sharper uptick in imports vis-à-vis exports, that was more than twice in absolute terms.

Merchandise exports

Merchandise exports rose to a near 2-year high of USD 42.0 bn in Mar-25 from USD 36.9 bn (+13.7% MoM and +0.7% YoY) in Feb-25 

1. Of the 14 key sub-categories of exports, 8 registered annual expansion. 
2. Best performance was seen in Plantation products (31.4%YoY), followed by Electronic items (29.6% YoY) and Marine products (28.6% YoY)
3. In contrast, the drag on exports was led by Miscellaneous products (-53.3% YoY) along with Petroleum products (-9.5% YoY).
4. Core merchandise exports (i.e., exports excluding Petroleum and Gems & Jewellery) rose to a record high of USD 34.2 bn in Mar-25 from USD 28.6 bn in Feb-25, clocking a strong sequential growth of 19.6%MoM owing to year end seasonality. Growth on annualised basis was however muted at 1.5%.

Merchandise imports

Merchandise Imports rose to a 4-month high of USD 63.5 bn in Mar-25 from USD 51.0 bn (24.6% MoM and 11.4% YoY) in Feb-25 

1. At a granular level, 11 out of 15 key import sub-categories registered annualized expansion. 
2. Strongest growth was clocked by Gems & jewellery (39.4% YoY), followed by Leather goods (37.4% YoY), Textiles and allied products (29.8%YoY) and Electronics (25.0% YoY) 
3. In contrast, the drag on imports emanated from Project goods (-87.2% YoY), Transport equipment (-25.5% YoY) and Ores & minerals (-23.3% YoY).
4. Core merchandise imports (i.e., imports excluding Petroleum and Gems & Jewellery) rose modestly USD 40.0 bn in Mar-25 from USD 36.7 bn in Feb-25. On annualized basis, core merchandise imports clocked a growth of 5.3%.

Merchandise Trade balance

1. Sequential widening in monthly merchandise trade deficit was driven single-handedly by the Non-core deficit (-USD 10.4 bn)
   1. Within Non-core items, deficit for Petroleum products widened to a record high of USD 14.1 bn in Mar-25 from USD 6.3 bn in Feb-25 
2. Core deficit eased to USD 3.6 bn in Mar-25 from USD 6.5 bn in Feb-25, owing to sequential improvement in trade surplus for Chemicals and Machinery. 

Services Trade

The estimate for services trade surplus for Mar-25 stands at USD 17.9 bn compared to USD 17.1 bn in Feb-25. While exports remained largely unchanged compared to previous month, imports recorded a contraction of 5.3%. 

In FY25, services trade surplus continued to grow at a healthy pace of 15.8%YoY. Services exports have remained resilient, benefitting from the continuing strength in US economy so far along with proliferation of Global Capability Centres that have helped to diversify exports beyond the traditional IT services. The expectation of a slowdown in global growth in 2025, remains on watch as a potential risk going forward.

Outlook

For FY25, India’s merchandise trade deficit widened to USD 283 bn from USD 241 bn in FY24. This was driven by petroleum products and gems & jewellery – together accounting for 96% of the incremental widening.

Mar-25 trade numbers did see the typical playout of year end seasonality, but also some pre-tariff surge. On the export side, pharma as well as electronics goods surged to record high. In addition, India’s merchandise exports to US stood at USD 10.2 bn in Mar-25, translating into a healthy annualised growth of 35.1% (vs FY25 growth of 11.6%). As per anecdotal evidence, Apple India air lifted sizeable number of I-phones to the US in the month of Mar-25, ahead of likely imposition of tariffs.

In similar vein, India too it appears front-loaded some of its imports, as seen in higher quantum of electronic goods, textile yarn fabric, fertilizers inbound shipments in Mar-25 compared to a year ago levels.

Looking ahead, for FY26, global geopolitics and geoeconomics will determine the course of India’s external trade.

As per WTO’s latest assessment, reactivation of the suspended "reciprocal tariffs" by the United States as well as the spread of trade policy uncertainty that could impact non-US trade relationships, poses significant risk to global merchandise trade outlook. If realized, reciprocal tariffs would reduce global merchandise trade volume growth by 0.6 pp in 2025 while spreading of trade policy uncertainty could shave off another 0.8 pp. As such, 2025 could record a 1.5% decline in world merchandise trade as per the global agency.

Services trade, though not directly subject to tariffs, is also expected to be adversely affected, with the global volume of commercial services trade now forecast to grow by 4.0%, slower than expected.

Additional duties imposed US on iron, steel and auto industries are likely to pull down engineering exports. Further, the tariff tussle between US and China, will have consequences for other markets including India, that could see an influx of cheaper Chinese imports.

Encouragingly, while crude prices have softened materially, prices could remain vulnerable to geopolitical developments and supply action of OPEC and US. On the other hand, gold prices escalating to a record high, could keep domestic demand in check. For India’s perspective, a lot would depend on the progress and shape of the Bilateral Trade Agreement negotiations.

Keeping all these factors in mind, we retain our FY26 current account deficit forecast of 0.8% of GDP (USD 33 bn) for now.

Rupee outlook

Global currencies are in a state of flux with market participants trying to assess the possible ramifications of a monumental geoeconomic shift triggered by the imposition of steep tariffs by the US. While a temporary tariff reprieve window is a welcome development, the spectre of heightened uncertainty continues to loom.

A change in market pricing in favor of a higher degree of monetary accommodation from the Fed is currently weighing upon the USD –the US interest rate futures market is currently pricing in a cumulative of 100 bps of rate easing from the Fed in 2025 compared to Fed’s dot plot implied cumulative easing of 50 bps. The DXY index has fallen by 4.6% in the Apr-25 so far and is currently trading at 99.4, a 3-year low.

In the near-term, pressure on the USD is manifesting in moderate appreciation in most EM currencies, including the INR. It is also possible that most EM countries like India, which have a merchandise trade surplus with the US are using the 90-day tariff rollover window to front load their exports to the US, thereby creating a temporary supportive backdrop for their currencies.

However, this could be short lived as adverse global spillovers will eventually have a cascading impact. In this extremely uncertain backdrop, INR could remain vulnerable to tariff flip-flops by the US, retaliation by key countries like China (which might involve an adjustment in the CNY), a likely drying up of foreign investment flows, etc. Having said, INR could also be one of the relatively lesser impacted currencies due to moderate exposure to US trade, a benign inflation outlook, limited pressure on current account deficit, and receding of overvaluation concerns. We maintain our USDINR call of 89.50 for Mar-26 amidst known-unknown risks.

Below is Acuité Ratings & Research Limited's comment:

“The sharp rise in India’s FY25 merchandise trade deficit to USD 283 bn, driven almost entirely by petroleum and gems & jewellery, highlights a narrow and vulnerable trade structure. March’s spike in both exports and imports reflects not just year-end seasonality but a clear pre-tariff rush, with pharma and electronics exports hitting records and anecdotal shipments like Apple’s iPhone airlifts to the US reinforcing the distortion. On the import side, a surge in electronics, fertilisers, and textile inputs suggests firms hedging against future cost escalation, not necessarily underlying demand strength.

The threat of the US reactivating reciprocal tariffs and the broader spread of trade policy uncertainty threaten key export segments like engineering goods that have high exposure to the US market. Simultaneously, tariff-induced diversion of Chinese exports could hurt some Indian manufacturers. The rupee has found temporary support from a weaker USD and front-loaded exports, but this may not last”

Table 1: Highlights of India’s trade balance*