India’s merchandise trade moderated to USD 26.5 bn in Aug-25 from an 8-month high of USD 27.3 bn in Jul-25. This was driven by a higher moderation in imports vis-à-vis exports vis-à-vis Jul-25 levels. 

Merchandise exports

Merchandise exports clocked USD 35.1 in Aug-25 (-5.7% MoM and +6.7% YoY) vis-à-vis USD 37.2 bn in Jul-25 

• Out of 14 key sub-categories of exports, 11 registered annualized expansion. 
• The strongest performance was seen in Electronic items (25.9%), Gems & jewellery (15.6%) and Ores and minerals (12.1%). 
• In contrast, there was a drag on account of Plastic and plastic items (-4.3%) and Textiles (-2.9%)
• Core merchandise exports (i.e., exports excluding Petroleum and Gems & Jewellery) eased to USD 28.3 bn in Aug-25 from USD 30.5 in Jul-25

Merchandise imports

Merchandise imports rose to USD 61.6 bn in Aug-25 from USD 64.6 bn in Jul-25 (-4.6% MoM and -10.1% YoY).

• Out of 15 key sub-categories of imports, 12 registered annualized expansion. 
• The strongest performance was seen in Chemicals (18.2%), Agri and allied (13.9%), Petroleum products (9.4%) followed by Electronic items (8.4%) and Textiles (6.3%).
• The drag was driven by Project goods (-90.6%), Gems & Jewellery (-51.3%), Leather goods (-27.0%) and Ores & minerals (-18.1%)
• Core merchandise imports (i.e., imports excluding Petroleum and Gems & Jewellery) eased to USD 41.0 bn in Aug-25 from USD 42.8 bn in Jul-25.

Merchandise trade balance

The sequential narrowing in the merchandise trade deficit in Aug-25 was led by Non-core deficit single-handedly. 

• Non-core trade deficit moderated to USD 13.8 bn in Aug-25 from USD 15.1 bn in Jul-25. 
• On the other hand, Core trade deficit widened, albeit modestly, to USD 12.7 bn in Aug-25 from USD 12.3 bn in Jul-25. 

Services trade

• The commerce ministry’s estimate for services trade surplus for Aug-25 stood at USD 16.6 bn, almost unchanged vis-à-vis USD 16.5 bn in Jul-25 (revised upwards from USD 15.5 bn earlier) 
• On a sequential basis, both exports and imports rose by 0.9%MoM
• On FYTD basis, momentum in services trade surplus remains healthy – it stood at USD 81.0 bn during Apr-Aug FY26, up from USD 68.2 bn in the corresponding period in FY25.
• Services trade surplus has continued to provide strength as well as stability to India’s current account over the last few years. The push for digitization post COVID accompanied by the proliferation of Global Capability Centres has helped to diversify exports beyond the traditional IT services. In addition, the global services trade has also remained outside the specter of US tariff threat so far.

Inferences and outlook

India’s goods and services trade balance has been resilient during the last five months, despite external headwinds. In case of goods exports, the front-loading of exports to the US (18.1% YoY) has supported the overall exports growth (2.5% YoY). In comparison, imports have registered a subdued growth (2.1%YoY), mainly due to lower gold imports (amidst record high global prices). 

Having said, the impact of tariffs is likely to become pronounced from Sep-25. The month of Aug-25 saw the imposition of the 25% tariff rate from 7th Aug-25, which was later upped to 50% (including a 25% penalty from importing energy items from Russia) from 27^th Aug-25. The 50% levy makes India one of the most tariffed countries in the world, turning Indian exports especially labour-intensive ones uncompetitive in comparison to competitors such as Vietnam and Bangladesh. There is anecdotal evidence of order books plunging in select sectors such as textiles and carpets as per media reports. 

On the imports front, the downward revision in GST rates (effective 22^nd Sep-25) along with a good outturn on 2025 monsoon, should help boost domestic demand. As such upcoming months could see a sizeable deterioration in trade balance. 

Having said, India-US political relations have shown some signs of warming up, as President Trump and PM Modi have resumed trade talks. A trade team from US is now in India, taking forward talks which had stalled in recent weeks. While India could maintain a firm stance on sensitive items under agriculture, etc., it could greater preferential market access to the US for several products and services. Eventually, there remains a high possibility of India’s tariff rate getting revised lower, in the vicinity of 20% - at par with other Asian peers. 

For our FY26 CAD forecast, we hold on to our estimate of 0.8% of GDP in case President Trump revokes the penalty tariff of 25% imposed on India. However, if the penalty tariff remains, then FY26 current account deficit could widen to 1.1-1.2% of GDP. 

Rupee outlook

In Sep-25, the Indian rupee breached the big figure level of 88 against the US dollar for the first time, thereby touching a fresh record low. INR’s recent tryst with record weakness appears somewhat at odds with the soft dollar backdrop – which is also manifesting in the regional trend in the Asian currency market, where most currencies have either strengthened since end Mar-25 or seen a modest weakness. Clearly, the relatively larger impact on INR compared to most peers reflects the imposition of a penalty tariff of 25% on India. 

Looking ahead, the INR trajectory would remain vulnerable to the tariff impact in the near term, along with its ramifications for India’s BoP. Understandably, both could remain adverse in the near term, barring the possibility of President Trump revoking the 25% penalty tariff, in which case there could be a knee-jerk appreciation pressure on the INR. As such, we maintain our INR forecast of 89.50 for Mar-26, while monitoring all relevant incoming data and news flow closely.

Besides India’s policy focus on maintaining macroeconomic stability as mentioned above, other related factors would also help in arresting any kind of runaway pressure for depreciation despite a hostile external environment:

• On the global front, the USD is once again on the back foot as market participants have priced in a larger monetary easing by 2026. As per the fed funds futures, 126 bps of cumulative Fed rate cut is priced in compared to the FOMC dot plot median consensus of 80 bps cut. More importantly, political interference in weakening institutional structures (removal of the head of the statistical body and attempts to vacate Fed Board positions on flimsy grounds) could be seen as long-term negative for the USD.
• Domestically, India’s inflation differential with the US has seen a massive correction in the last 6 months. The GST restructuring could further amplify this in India’s favour in the coming months.
• From a valuation perspective, INR is estimated to be 1-2% overvalued as per REER’s deviation from its long-period average in Jul-25. The depreciation seen since Jul-25 could potentially make INR fairly valued on the REER metric.
• Last but not the least, the recent sovereign ratings upgrade for India is a medium-term structurally positive development that would help attract durable capital flows at a lower cost to the economy. 

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