India’s merchandise trade deficit widened to the highest level in 10 months, to USD 29.7 bn in Aug-24 from USD 23.6 bn in Jul-24. This was driven by a sharp sequential increase in imports vis-à-vis exports last month.

Merchandise Exports

Merchandise exports rose marginally to USD 34.7 bn in Aug-24 (+2.4%MoM and -9.3% YoY) from USD 33.9 bn in Jul-24.

• Of the 14 key subcategories of exports, 8 registered annualized expansion. The best performance was seen in the case of Plantation products (44.1%), Plastic & rubber (11.1%) and Electronic items (7.9%)

• Sub-categories that weighed on exports yet again were Petroleum products (-37.6%), Stone, plaster, cement, etc., (-23.2%) and Gems and jewellery (-23.1%)

• On sequential basis, in addition to Petroleum exports (USD 0.7 bn), Machinery exports registered an expansion (USD 0.4 bn).

• Core exports (i.e., exports excluding Petroleum and Gems & Jewellery) remained unchanged at USD 26.8 bn in Aug-24 – same as in Jul-24

Merchandise Imports

Merchandise imports soared to a record monthly high of USD 64.4 bn (12.0% MoM and +3.3% YoY) vs. USD 57.5 bn in Jul-24.

• At a granular level, 10 out of 15 key import sub-categories registered annualized expansion. Strongest growth was clocked by Gems & jewellery (78.1%), Leather goods (70.6%), along with Electronic items (12.8%).
• Drag on imports was led by Petroleum products (-32.4%), Chemicals (-23.4%) and Project goods (-17.9%).
• Sequentially, petroleum imports eased by USD 2.9 bn in the month to a near 3-year low of USD 11.9 bn, reflecting the moderation in global Brent crude oil price from a peak of USD 89 bn in Apr-24 to ~USD 74 bn in Sep-24, so far.
• However, this was more than offset by USD 8.1 bn sequential jump in Gems and jewellery imports, to a record high of USD 12.7 bn – influenced by the reduction in customs duties announced in the Budget.
• Core imports rose marginally albeit to a record high of USD 40.7 bn in Aug-24 from USD 39.0 bn in Jul-24, with sequential improvement in Base metal (USD 0.5 bn) along with Machinery items (USD 0.5 bn) and Transport equipment (USD 0.7 bn) imports. 

Trade Balance

• Sequential expansion in monthly merchandise trade deficit was driven by non-core deficit, which rose to USD 15.7 bn in Aug-24 from USD 11.4 bn in Jul-24. While the trade deficit for petroleum goods moderated, that for Gems and Jewellery increased by a greater magnitude.

• Core deficit rose marginally to USD 13.9 bn in Aug-24 compared to USD 12.1 bn in Jul-24, on account of rise of deficit under Electronics (to 2-1/2 year high) and Miscellaneous products (to a record high).

Services Trade

The estimate for services trade surplus in Aug-24 rose to USD 15.0 bn compared to USD 14.7 bn in Jul-24. Exports rose on a sequential basis, while imports drifted lower. In absolute terms, exports were at a 7-month high of USD 30.7 bn. Looking through monthly volatility in data, services trade surplus, after moderating in initial months of the CY24, has shown a marginal improvement over the last months (See Chart 1). This has been driven by a pick-up in services exports, that more than offset the upside in imports. While a break-up of services trade data will be available with a lag, the diversification of services exports beyond the traditional IT services appears to be supportive of a stable growth in services exports.

CAD Outlook

The incoming data on trade is validating our expectation of an expansion of trade deficit. The significant reduction in custom duties on gold announced in the Budget, are beginning to have an adverse impact. We will keep a close watch on evolving changes, and fine tune our forecasts post the release of Q1 FY25 Balance of Payments data later this month. For now, we retain our FY25 current account deficit forecast of 0.9% of GDP vs. 0.7% in FY24 with upside risks, amidst an uncertain global environment marked by –

• Lingering geopolitical concerns
• Imminent elections in US and rise in associated protectionist tendencies, especially with respect to trade with China.
• Concerns of a global growth slowdown, led by China along with other economies such as LATAM, Europe and the US. 

Rupee Outlook

Since end Jul-24, the USD has weakened (1.6% on trade weighted basis) on the back of aggressive repricing of monetary policy easing by the US Fed, with interest rate futures market currently attaching a strong possibility of 75 -100 bps before end Dec-24. Over the last 3 months, the dollar index (DXY) has slipped by 4.2% amidst the expectation of such rate cuts by US Fed.  

The Indian rupee continues to stay in a prolonged phase of stability despite signs of volatility in the global FX market. On FYTD basis, INR has been largely stable, with just 0.6% depreciation, compared to wild gyrations in the FX space. RBI’s active intervention in the FX market has continued to support the stability of the INR.

Overvaluation in INR has reached a 4-year high and is currently poised for a correction. Any anticipated INR correction is likely to be gradual and shallow on account of India’s strong underlying macroeconomic stability and some tailwinds from the widely anticipated Fed pivot in Sep-24. While the INR may gain some strength in the near term due to the Fed actions and the possible capital flows, we maintain our call of USD/INR moving towards 84.5 levels by Mar-25.

It is also worthy to note that India’s foreign exchange kitty have been rising steadily, setting new record high of USD 689.2 bn as in the first week of Sept’24, according to the Reserve Bank of India. We believe that RBI will continue to absorb the FX volatility and keep the currency in a tight range, resulting in INR being one of the most stable among its Asian peers this year.

Says Suman Chowdhury, Chief Economist and Executive Director, Acuité Ratings & Research “The relative strength of the Indian economy vis-à-vis the developed economies and most of the emerging economies has started to get reflected in India’s trade balances. While the monthly trade deficit in Aug’24 moved up to a 10 month high, the cumulative trade deficit in the Apr-Aug period is already higher by ~USD 17 bn compared to that of last year.

Clearly, two factors have led to the increased trade deficit (i) weaker exports due to global slowdown particularly refined oil exports (ii) surge in gold imports particularly in Aug’24 to USD 10 bn, possibly the highest ever monthly figure recorded in India driven by a significant drop in customs duty. We don’t expect the trade deficit to sustain at such high levels but it is evident that it will be materially higher vs last year, which will also translate into an upside risk for CAD which we have forecast at 0.9% of GDP.    

Nevertheless, the tailwinds from the rate cuts in US and other developed nations can lead to a stronger INR vs the USD in the near term. Over the next two quarters, however, we expect the INR to depreciate from the current levels and touch around 84.5 given its intrinsic overvaluation and the active intervention of the central bank which has shown its preference for forex reserve accumulation.” 

Table 1: Highlights of India’s trade balance*

Chart 1: Services exports showing signs of strength over the last two months

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