India’s merchandise trade deficit widened sharply to USD 34.7 bn in Jan-26, from USD 25.0 bn in Dec-25, reaching its highest level since the record high of USD 42.0 bn in Oct-25. While export momentum weakened and turned negative, imports staged a sharp double-digit sequential pickup in Jan-26.

Merchandise exports

Merchandise exports eased to USD 36.6 bn in Jan-26 (-5.1% MoM and +0.6% YoY) from a nine-month high of USD 38.5 bn in Dec-25. 

Out of 14 key sub-categories of exports, 7 registered annualized expansion. 

• Plantation products (21.1%) emerged as the top performer, followed by Marine products (13.3%), Ores & minerals (13.0%), Machinery goods (10.4%) and Petroleum products (8.5%). 
• In contrast, the remaining half of sub-categories exerted an annualized drag, led by Gems & Jewellery (-23.0%), Plastic & rubber (-11.8%), Agri & allied products (-9.7%), Leather goods (-7.7%) and Textiles (-3.8%).  
• Core merchandise exports (i.e., exports excluding Petroleum and Gems & Jewellery) declined to USD 30.5 bn in Jan-26 from USD 32.0 bn in Dec-25. 

Merchandise imports

Merchandise imports surged to USD 71.2 bn in Jan-26 Dec-25 from USD 63.6 bn in Dec-25 (+12.1% MoM and +19.9% YoY), marking the second-highest level on record, below the peak of USD 76.1 bn in Oct-25.

Out of 15 key sub-categories of imports, 8 registered annualized expansion. 

• The sharpest annualized increase was seen in Gems & Jewellery (218.4%), followed by Leather goods (18.6%), Machinery goods (14.5%), Electronic items (9.1%), and Plastic & rubber (8.0%) among others. 
• The annualized drag on imports was driven by Project goods (-14.8%), Chemical & related products (-7.7%), Ores & minerals (-7.4%) and Transport equipment (-5.3%) among others. 
• While Core imports remained broadly stable, Non-core merchandise imports registered a sharp sequential pickup compared with Dec-25:
  1. Core merchandise imports (i.e., imports excluding Petroleum and Gems & Jewellery) eased marginally by 0.3% MoM to USD 42.6 bn in Jan-26. 
  2. Non-Core merchandise imports jumped to USD 28.6 bn vis-à-vis USD 20.9 bn in Dec-25
     • Gold imports, after two months of normalisation rebounded sharply to mark the 3^rd highest level on record at USD 12.1 bn (+192% MoM), vs. the festive-led peak of USD 14.7 bn in Oct-25. 
     • Silver imports rose markedly, to the 2^nd highest level on record at USD 2.0 bn (tad below all-time high of USD 2.7 bn in Oct-25)

Merchandise trade balance

The merchandise trade deficit expanded sharply to USD 34.7 bn in Jan-26, from USD 25.0 bn in Dec-25, largely being driven by the non-core segment which accounted for nearly 85% of the sequential widening in the overall trade deficit. 

• Non-core trade deficit widened to USD 22.6 bn in Jan-26, from a four-month low of USD 14.4 bn in Dec-25.
  1. This largely reflected the gems and jewellery trade deficit which deteriorated sharply to USD 13.0 bn (+198% MoM) in Jan-26, after staying flat at USD 4.3 bn in the preceding two months, even as Petroleum deficit narrowed further to a four-month low. 
  2. Unlike the Oct-25 festive spike, the surge in precious metals imports in Jan-26 largely reflects the impact of record high global prices rather than volumes.
• On the other hand, Core trade deficit edged higher to clock at USD 12.1 bn in Jan-26, vis-à-vis USD 10.7 bn in Dec-25. 

Services trade

• The commerce ministry’s estimate for services trade surplus for Jan-26 stood at USD 24.3 bn – a record high - compared with USD 22.7 bn in Dec-25. 
• On a sequential basis, both services exports and imports rose by 5.1% and 2.6%, respectively in Jan-26, although lower than the double-digit sequential expansion seen in Dec-25. 
• On FYTD basis, momentum in services trade surplus remains healthy. It stood at USD 180.6 bn over Apr-Jan FY26, up from USD 153.5 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 (GCCs), including the consolidation of IT/ITes under a unified framework with a higher safe harbour threshold and extended tax incentives for foreign cloud service providers. 

Inferences and outlook

The deterioration in Jan-26 trade deficit was largely attributable to a pickup in imports, especially those of Gems & jewellery. To give some context: 

• The contribution of Gems and Jewellery trade deficit to the cumulative trade deficit increased to 22.2% on an FYTD basis (Apr-Jan) (vs 18.5% last year). Notably, while FYTD gold imports remain elevated, albeit with growth moderating to 20% (vs 35% last year), silver imports during the same time recorded a sharp acceleration of 129% (vs 48% last year). 
• Further, international commodity prices have firmed up amidst heightened geoeconomic and geopolitical uncertainties, with the IMF’s Commodity Price Index driven up by a sharp 65.8% FYTD increase in precious metals. In Jan-26 alone, international price of gold and silver recorded annualized gain of 74.3% and 210% respectively. 
• Rise in discretionary urban demand has been underpinned by lagged impact of RBI’s 125 bps of cumulative rate cuts, FY26 budgetary provision of income tax relief, GST rate cuts amid favourable monsoon keeping rural consumption buoyed. 

From a geographical lens, the moderation in exports captures the following: 

• India’s exports to the US de-grew by 21.8% YoY in Jan-26, marking the fifth full month of the 50% tariff level. Despite the post-tariff cumulative contraction of 6.1% (Sep-25 to Jan-26), significant front-loading has kept the FYTD exports to the US buoyant (+5.9%).
• At a granular level, select labour-intensive exports to the US, with limited frontloading, bore the brunt of the tariff shock during Sep-Nov-25, particularly Gems & Jewellery (-60%YoY), Marine Products (-27.5%YoY), Textiles and articles (-22%YoY), and Leather & footwear (-17.9%YoY). 
• Although exports to Bangladesh, South Africa, France, UK and Singapore also weakened during Jan-26, the drag was outweighed by higher shipments to Hong Kong, China, Italy, UAE and Netherlands, among others. 
• On the other hand, the expanding services trade surplus (up 17.6% FYTD26) continues to offset the drag on goods exports, while keeping the pressures on the current account well anchored. 

The past few weeks have marked a pivotal phase in India’s trade landscape: 

• Building on its expanding FTA base, the India-EU trade deal touted as the ‘mother of all trade deals’, was signed on 27^th Jan-26 spanning nearly ~25% of global GDP and one-third of the global trade. Once operational, it envisages immediate tariff elimination on over 90.7% of India’s exports unlocking significant untapped potential for India, given its underpenetrated ~2.5% share in the EU’s overall import basket. 
• India’s imports of Russian crude fell to a 38-month low in Dec-25 (-24% MoM), with its share in India’s crude basket declining to a three-year low, paving way for the interim India–US trade deal announced on 7^th Feb-26. 
• Under the proposed agreement, US tariffs on Indian merchandise exports have been reduced from a cumulative 50% to a reciprocal 18%, one of the lowest in Asia, offering meaningful relief vis-à-vis key peers such as China (34%), Vietnam (20%), and Bangladesh (19%), while also easing pressure on INR and lending support to the capital account. While the detailed contours of India-US trade deal remain work in progress, India’s commitment to scale up imports from the US to USD 500 bn over the next five years, remains ambitious.

Notably, despite the withdrawal of GSP benefits that raise tariffs on Indian exports to the EU to ~12%, the tariff burden remains significantly lower than the 18% reciprocal rate imposed by the US, which is well above its historical average. This tariff asymmetry could lead to a gradual geographical realignment in India’s export trajectory in the medium term. However, the pace and extent of such reorientation will depend on the timely operationalization of these trade accords. In this regard, the India-UK FTA signed in Jul-25, is likely to come into force over the coming few months, providing an additional fillip to India’s export diversification momentum.

Accordingly, we retain our FY26 CAD forecast at 1.3% of GDP.

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: Import growth has outpaced growth in export, through much of FYTD26