India’s merchandise trade deficit widened at the start of FY25, to a 4-month high, coming in at USD 19.1 bn in Apr-24 vis-a-vis USD 15.6 bn in Mar-24. The widening was led by a faster sequential contraction in exports vis-à-vis imports in the month. 

Merchandise Exports

Merchandise exports fell to USD 35.0 bn in Apr-24 (-16.0% MoM and 1.1% YoY) from USD 41.7 bn in Mar-24. This marked the lowest level of exports in 5-months.

1. Of the 14 key subcategories of exports, 7 registered annualized expansion. The best performance was seen in the case of Electronics (25.8%), Plantation (18.7%), and Chemicals (11.9%).

2. Sub-categories that weighed on exports were Ores & minerals (-34.7%), Marine products (-12.9%), Leather (-7.2%), Gems & jewellery (-6.9%), Stone, plaster, cement, etc. (-6.5%), and Agri & allied products (-5.5%).
   
3. On sequential basis, petroleum exports rose by USD 1.2 bn to USD 6.6 bn supported by escalation in crude oil prices in Apr-24 (Brent crude oil price hardened by 5.3%MoM in the month).

4. Core exports (i.e., exports excluding Petroleum and Gems & Jewellery) eased to a 5-month low of USD 26.1 bn from USD 33.7 bn in Mar-24, driven by decline in exports of Machinery (-USD 2.6 bn), Chemicals (-USD 1.7 bn), and Electronics (USD -0.9 bn). The weakness in core exports reflects the continuing headwinds in the global trade scenario.
5. The 22.9% MoM drop in core exports in Apr-24 outpaced the average historical pace of decline of 14.0% usually recorded for the month of April.

Merchandise Imports

1. Merchandise imports printed at a 3-month low of USD 54.1 bn (-5.6% MoM and 10.3% YoY) vs. USD 57.3 bn in Mar-24
   
2. At a granular level, 5 out of 15 key import sub-categories registered annualized expansion. This was led by Gems & Jewellery imports which clocked the highest pace of expansion at 52.1%, followed by Agri & allied products (40.2%), Petroleum products (20.2%), and Project goods (17.2%).
   
3. On the other hand, drag on imports was led by Paper products (-10.7%), Plastic & rubber articles (-10.3%), Ores & minerals (-9.8%), and Chemicals.

4. Sequentially, petroleum imports eased marginally to USD 16.5 bn in Apr-24 from USD 17.2 bn in Mar -24. On the other hand, gold imports rose to USD 3.1 bn in Apr-24 from USD 1.5 bn in Mar-24, likely reflecting record high global prices and some restocking ahead of Akshat Tritiya next month.
   
5. As such, Core imports eased to USD 32.7 bn from USD 35.2 bn in Mar-24, led by sequential decline in Transport equipment (-USD 0.6 bn), Electronics (-USD 0.5 bn) and Machinery (-USD 0.4 bn)

Service Trade

Services trade surplus moderated further to a 9-month low of USD 12.6 bn in Apr-24, from USD 13.4 bn in Mar-24 (revised higher from USD 13.1 bn as per preliminary estimates). The entire moderation in services trade surplus over the last 3 months from a peak of USD 16.2 bn in Jan-24 has been driven by a slowdown in services exports, accompanied by an increase in services imports by a lesser magnitude. While a break-up of services trade data will be available with a lag, it is most likely that the ongoing slowdown in exports is being led by the IT sector, as suggested in the earnings commentary. 

Outlook

Apr-24 witnessed a strong rally in commodity prices amidst escalation of geopolitical tensions, with Reuters CRB index rising by 5.2%MoM. While prices have eased this month (CRB index is down 2.9% MTD owing to talks of a ceasefire between Israel and Iran), higher commodity prices along with resilience in global growth has helped to hold Indian exports at the current levels.

Having said, some dynamics that are likely to play out in FY25 –

1. Downside to crude prices is likely to be limited amidst commitments of production cut by OPEC+ along with geopolitical tensions that continue to linger.
2. Upside in gold prices could remain intact, amidst continued demand for the asset as a safe haven, aided by consistent central bank purchases and expectations of US rate pivot on the anvil.
3. It appears that trough of India’s exports is behind us, with outbound shipments likely to perform better as global growth resilience continues.  
4. Though services exports have been a bright spot, some degree of stabilization at a level below its recent peak, going forward cannot be ruled out.

In FY24, the merchandise trade deficit moderated to USD 238 bn from USD 265 bn in FY23. The moderation was primarily driven by Chemical products, Ores & minerals, Petroleum products, and Agri & allied products. While the softness of global commodity prices did facilitate the decline in trade deficit, the waning of supply bottlenecks and strength in global demand offered support to exports along with the momentum seen in categories like electronics.

We hold on to our FY24 current account deficit estimate of 0.8% of GDP (USD 28 bn). For FY25, while we maintain our current account deficit forecast at 1.0% of GDP, the ongoing geopolitical conflict in the Middle East is a live risk and its possible impact on commodity prices needs to be watched closely for trade implications. 

Rupee outlook

Notwithstanding gyrations in the global currency markets in the last one month, the INR kickstarted the new financial year 2024-25 on a firm footing vis-à-vis the USD. Although the general election cycle is currently underway, we believe the overall policy backdrop of domestic macroeconomic stability is likely to prevail in FY25.

From a global perspective, however, the band of uncertainty surrounding the external factors has widened considerably in the last few weeks. Resilience in US economic data coupled with stickiness in inflation has diluted the likelihood of an early pivot by the US Fed. The recent firming up of international commodity prices further complicates the monetary policy assessment. The soft-landing consensus that existed until Mar-24 now seems to be drifting towards a stagflation scenario in the US, as the wait for the Fed pivot gets prolonged. Notably:

• Market participants are currently pricing in just about 1-2 rate cut from the Fed before the end of CY24.
• The US Fed, which was supposed to lead the rate easing cycle among DM central banks is now expected to trail the SNB, ECB, BoC, BoE, and the RBNZ.

While domestic dynamics continue to provide a stable underpinning to the INR, global factors like uncertainty on US monetary policy trajectory and geopolitical risks could result in bouts of depreciation pressure. Overall, for FY25, INR’s overvaluation, and RBI’s penchant for reserve accumulation would tilt the balance in favor of a mild depreciation. We maintain our call of USDINR moving towards 84.50 levels by Mar-25.

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

Says Suman Chowdhury, Chief Economist and Head – Research “India’s trade deficit in Apr-24 is the highest since Nov-23 and is primarily driven by higher bills on oil and gold imports, where global prices have seen a firm up. Put together, these two have added almost USD 5.0 bn into the deficit figures as compared to Apr-23. Core exports and imports (excluding oil and bullion) have remained virtually stagnant since last April, reflecting the continuing challenges on the global trade front.  

With the loss in the momentum of services exports primarily due to a slowdown in global IT services, the net services exports is estimated to have slipped to USD 12.6 bn in Apr-24 as compared to a monthly average of USD 13.6 bn in FY24.

India’s current account deficit (CAD) is expected to see an upward pressure in FY25 from an estimated 0.8% in FY24, if oil and gold prices don’t cool soon enough. In the backdrop of volatile capital flows and uncertainty on Fed’s rate cut decision, this can push INR closer to 84.0 than earlier expected.”