India’s merchandise trade deficit narrowed for the third consecutive month, to a 9-month low of USD 17.5 bn in Jan-24 from USD 18.9 bn in Dec-23. The sequential correction was led by a faster moderation in imports versus exports in the month. 

Merchandise exports

Merchandise exports continued to witness a weak trajectory and stood at USD 36.9 bn in Jan-24 (-4.0%MoM and 3.1%YoY).

1. Of 14 key subcategories of exports, 8 registered annualized expansion. The highest growth was clocked by Ores & Minerals (+44.4%), Plastic and rubber (+9.6%) and Electronics (9.3%)
2. Drag on exports in annualised terms was led by Miscellaneous exports (-16.6%), Marine Products (-14.6%), Leather (-6.6%) and Stone, Plaster, Cement, etc. (-3.3%). 
3. Petroleum exports expanded by 6.6%YoY – to mark the first expansion in last one year, amidst increase in crude oil prices in the month. Sequentially, crude exports rose by 19.3% in the month, to USD 8.2 bn – the highest level in last 13 months. Brent crude oil price increased by 2.9% in Jan-24, reversing the continued decline seen over the previous three months. 
4. Core exports (i.e., Exports excluding Petroleum and Gems & Jewellery exports) slipped from a 4-month high of USD 28.7 bn in Dec-23 to USD 26.1 bn in Jan-24, driven by decline in exports of Machinery (-USD 1.3 bn) and Chemical products (-USD 0.5 bn). The weakness in exports reflect the global economic slowdown and its impact in certain geographies particularly Japan, Europe and China. 

Merchandise Imports

Merchandise imports stood at USD 54.4 bn (-6.6% MoM and 3.0% YoY) in Jan-24 

1. At a granular level, only 5 of the 15 sub-categories registered an annualised expansion. Gems & jewellery clocking a growth of 68.9%YoY emerged as the best performer, followed by Electronic items (+27.8%YoY) and Ores and minerals (+16.5%YoY). 
2. Drag on imports was led by Project Goods (-43.9%), Chemicals (-31.5%), Leather goods (-28.8%) and Paper & paper products (-27.4%).
3. Sequentially, Petroleum imports rose to USD 16.6 bn in Jan-24 from USD 14.9 bn in Dec-23, reflecting the increase in crude oil prices. On the other hand, gold imports slipped to the lowest level in 9 months of USD 1.9 bn after the peak marriage season.  
4. Core imports moderated materially to USD 33.7 bn in Jan-24 from USD 38.0 bn in Dec-23, led by sequential decline in Electronic goods imports (-USD 1.5 bn) and Chemicals (-USD 1.1 bn). This reflects a moderation in consumption demand and also possibly the slower growth in private investment activity. 

Trade balance

1. The sequential correction in monthly merchandise trade deficit was led by Core deficit, which eased from USD 9.3 bn in Dec-23 to USD 7.6 bn in Jan-24.
2. Within core, the contraction of trade deficit was led by Electronics goods and Chemicals.

Services Trade

Services trade surplus is estimated to have risen to a record high of USD 16.8 bn in Jan-24 from USD 16.0 in Dec-23. This was led by services exports continuing to rise, to a record high of USD 32.8 bn in Jan-24. While a break-up of services trade data will be available with a lag, it is expected that the continued diversification of services exports led by category of ‘Other business services’ reflecting the growth of Global Capability Centres (GCCs) in India, has supported the traditional strength enjoyed by IT services exports from India. 

Outlook

Jan-24 trade data was keenly awaited to gauge the impact of Red Sea tensions, if any on India. Looking at the data, it can perhaps be concluded, that impact has been insignificant so far. The sequential correction in both exports and imports in Jan-24, is in line with seasonality typically seen in January and does not appear out of line. 

Nevertheless, the impact of Red Sea tensions on global merchandise trade, including India could be felt more materially in the coming months, if the current situation was to prolong. As per port data activity released by IMF, we estimate that the decline in average daily transit volume via Bab el-Mandeb Strait (by 56%YoY) has been fully compensated by increase in daily transit volume via Cape of Good (+60%). However, this comes at a higher logistics cost owing to the longer route, and transit delay of 2-3 weeks. Purchasing managers’ surveys at the global level, indicate an increase in delivery timelines especially for UK and Eurozone, concentrated mostly in sub-sectors of Food and Construction material, so far. 

Keeping in mind the still developing cross-currents, we will keep a close watch on the impact of tensions in the Red Sea region on India’s trade dynamics, that could reflect with a lag. In the interim, while we maintain our FY24 current account deficit forecast of 1.3% of GDP (USD 47 bn), there is a downside risk to this estimate amidst broad comfort on global commodity prices. 

Rupee outlook

After facing persistent, albeit mild depreciation pressure through most of FY24, INR is finally trying to recoup some of its losses by way of consolidation. It appreciated by 0.2% in Dec-23, gained a similar magnitude in Jan-24, and is currently trading flat in the month of Feb-24 (as of Feb 15, 2024).

• We continue to believe that INR could remain supportive in Q4 FY24 on account of favorable year-end seasonality and market positioning ahead of India’s inclusion in JPM EM bond index (from Jun-24). 
• While domestic election related uncertainties remain on the table, the tail risks have reduced significantly after the state elections (that on aggregate basis went in favour of the incumbent BJP government at the centre).
• Notwithstanding the gyrations in market sentiment, the expectation of interest rate easing by the US Fed over calendar 2024 remains largely intact. This is bound to be supportive of a weaker dollar and therefore stronger emerging market currencies in the near-term.

Says Suman Chowdhury, Chief Economist and Head – Research “India’s external trade and current account position is unlikely to witness any significant improvement in FY25. Oil prices are unlikely to weaken materially from the current levels given the continuing geo-political risks, the persistent production cuts by OPEC+ and the expectation of an improving global growth outlook in the second half of the year due to the expected rate cuts. In the short term, trade related uncertainties have worsened with the ongoing disturbance in the Red Sea region potentially impeding trade, global supply chains and escalating costs. We expect India CAD to remain in the range of 1.3%-1.8% over the next few quarters. 

Nevertheless, factors are favourable for a mild near-term appreciation in INR with expectation of higher FPI flows in both debt and equity. While USDINR is likely to attempt a move lower towards 82.50 levels by Mar-24, we believe it is unlikely to result in a durable trend due to RBI’s potential intervention in the FX market. In addition, Fed’s rate easing cycle in 2024 would soon be followed by key central banks over the medium term, thereby mitigating the weakness in the USD. As such, we expect INR to post a moderate weakness towards 84.0-84.5 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

Chart 1: Recovery in services exports with a record high in Jan-24