India’s merchandise trade deficit narrowed sharply to USD 27.1 bn in Feb-26, easing from its third-highest level on record at USD 34.7 bn in Jan-26. The improvement was primarily driven by a double-digit sequential contraction in imports, even as exports remained broadly unchanged. 

Merchandise exports

Merchandise exports remained almost unchanged at USD 36.6 bn in Feb-26 vis-à-vis Jan-26 (+0.1% MoM and -0.8% YoY).

Out of 14 key sub-categories of exports, 9 registered annualized expansion including 5 with double-digit gains. 

• Plantation products (20.8%) emerged as the top performer, followed by Marine products (13.3%), Machinery goods (12.9%), Electronics (10.4%), and Other handcrafts (10.2%). 
• In contrast, sub-categories which exerted an annualized drag were led by Petroleum products (-40.1%), Plastic & rubber (-8.8%), Textiles (-5.0%), Leather goods (-4.8%) and Ores & minerals (-0.9%). 
• Core merchandise exports (i.e., exports excluding Petroleum and Gems & Jewellery) too remained unchanged at USD 30.5 bn in Feb-26, even as they were 6.6% higher on an annualized basis.

Merchandise imports

Merchandise imports eased to USD 63.7 bn in Feb-26 from the second-highest level on record in Jan-26, i.e., of USD 71.2 bn (-10.6% MoM and +24.1% YoY).

Out of 15 key sub-categories of imports, 11 registered annualized expansion. 

• The sharpest annualized increase for the second consecutive month was seen in Gems & Jewellery (157.1%), followed by Electronic items (33.4%), Optical, medical & surgical instruments (25.9%), Machinery goods (22.9%), Ores & minerals (22.1%), and Base metals (17.5%) among others. 
• The annualized drag on imports was driven by Project goods (-81.3%), Transport equipment (-23.6%), Textiles (-16.4%) and Paper & related products (-4.4%). 
• Both core and non-core merchandise imports eased meaningfully from Jan-26 levels.
  1. Core merchandise imports (i.e., imports ex Petroleum and Gems & Jewellery) moderated to an 8-month low USD 40.3 bn from USD 42.6 bn in Jan-26
  2. Non-Core merchandise imports eased to USD 23.4 vis-à-vis USD 28.6 bn in Jan-26. 
     • Gold imports declined sharply to USD 7.4 bn, retreating from a lofty level of USD 12.1 bn in Jan-26.
     • Concurrently, silver imports eased to USD 1.7 bn from the 2^nd highest level on record at USD 2.0 bn in Jan-26.
     • Petroleum imports fell further to a 12-month low of USD 13.0 bn (-3.3% MoM) 

Merchandise trade balance

Merchandise trade deficit narrowed sharply in Feb-26, largely driven by the non-core segment which accounted for nearly 70% of the sequential narrowing.

• Non-core trade deficit moderated to USD 17.3 bn in Feb-26, from USD 22.6 bn in Jan-26.
  1. The sequential narrowing was solely driven by the correction in gems and jewellery trade deficit which reverted to single digits at USD 7.8 bn in Feb-26
• On the other hand, Core trade deficit fell to an eight-month low of USD 9.8 bn in Feb-26, vis-à-vis USD 12.1 bn in Dec-25. 

Services trade

• The commerce ministry’s estimate for services trade surplus for Feb-26 stood at USD 23.2 bn - a record high, compared with USD 21.5 bn in Jan-26. 
• The expansion in trade surplus was led by a sequential improvement in services exports by 3.6%, even as services imports eased by 1.5%  
• On FYTD (Apr-Feb) basis, services trade surplus stands at USD 201 bn, significantly higher than USD 170.7 bn in the corresponding period in FY25.
• Services trade surplus has continued to provide stability to India’s current account in FY26. The FY27 Union Budget has further reinforced India’s structural advantage as a global services hub by providing long-awaited tax certainty to technology firms and Global Capability Centres, including the consolidation of IT/ITes under a unified framework with a higher safe harbour threshold and extended tax incentives for overseas cloud service providers. 

Inferences and outlook

Feb-26 trade deficit, while being lower than the FYTD26 average run-rate, largely reflected the following: 

• Exports broadly maintained strength, notwithstanding that elevated tariff level of 50% that continued up to 3^rd week of Feb-26.  Recall, the US Supreme Court, in a 6-3 decision, struck down President Donald Trump's use of the 1977 International Emergency Economic Powers Act (IEEPA) to impose sweeping tariffs. Following the US Supreme Court’s ruling, President Trump’s nevertheless has succeeded in imposing of a uniform 15% tariff across trading partners, for a period of 150 days. 
• The sequential contraction in gems and jewellery imports, which drove the narrowing in merchandise trade deficit, was primarily led by a correction in gold imports. This points to a likely moderation in import volumes amidst a sharp unabated increase in international gold prices in Feb-26 (up 73.4%YoY). 

From a geographical lens -

• Barring the transitory uptick in Nov-25, India’s exports to the US continued to contract for the fifth consecutive month by 12.9% YoY in Feb-26. 
• On the other hand, exports to China, Hong Kong, Italy, Brazil, and Vietnam have increased during Feb-26, however gains were outweighed by the drag in shipments to UAE, Netherlands, Saudi Arabia, Australia, Singapore, and Bangladesh, among others. 

India’s trade environment in recent weeks has been characterised by near term headwinds, alongside medium-term tailwinds. 

• The abrogation of President Trump’s IEEPA-based tariffs, has meant that the US-India interim trade deal needs to be reassessed. 
• In addition, US has opened a new trade investigation against 16 countries, including India and China, over concerns of over-capacity in key manufacturing sectors. 
• The US-Israel/Iran war has transformed into a broader regional conflict, with no signs of de-escalation. Given India’s structural dependence on crude imports (close to 85%), with nearly half of these volumes transiting through the now-blockaded Strait of Hormuz, the risks remain formidable.
• Nevertheless, the broader outlook remains underpinned by India’s expanding FTA footprint. In particular, the EU and the UK trade agreements envisage tariff elimination on ~90.7% and ~99% of India’s exports to these markets respectively. Together, these geographies account for ~19.7% of India’s exports in FYTD26 (till Jan), comparable to the US. 

From the perspective of Middle East crisis impact –

• The dual price and supply shock could bloat India's oil import bill which had contracted by 3.9% on an FYTD basis (vs +2.1% in the corresponding period last year). Having said, the impact of oil shock could be curtailed (if the price shock is temporary) with OMC’s absorbing the price increase and India possibly diversifying its crude sourcing, aided by a 30-day US waiver to purchase Russian crude (~20% of India’s crude share in Feb-26). 
• In contrast, risks to India’s gas segment appear more formidable. The country relies on imports of LNG and LPG, with ~70% and ~60% of import volumes, transiting via the now-blockaded Strait of Hormuz. substitution. These pressures have already begun transmitting, via a 7.9% and 6.9% increase in commercial and household LPG cylinder prices, respectively.
• Further, exports to the GCC region which accounted for 13.3% of India’s total exports in FYTD26, remain exposed to regional spillovers. 
• India’s external sector stability is structurally anchored by robust inward remittances, which scaled to USD 135.4 bn in FY25. With the GCC nations accounting for ~38% of these inflows, a protracted West Asian conflict could pose a medium-term risk to this critical BOP buffer.

The fallout on India’s external sector from the ongoing Middle East crisis will hinge primarily on two factors: the duration of the conflict and the extent of disruption to global energy supplies. Accordingly, our baseline FY26 CAD estimate of 1.1% premised on crude prices of ~USD 70 pb, could widen to ~1.6-1.9% of GDP if prices persist in the USD 80-90 pb range. In a more adverse scenario, with crude prices sustaining above USD 100 pb, the CAD could deteriorate further to ~2.2%

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’s trade deficit narrowed in Feb-26, led by Gems & Jewellery