India’s merchandise trade deficit widened to the highest level in 3-quarters of USD 23.5 bn in Jul-24 from USD 21.0 bn in Jun-24. This was driven by a sequential decline in exports and further accompanied by a rise in imports vis-à-vis last month.

Merchandise Exports 

Merchandise exports moderated to an 8-month low of USD 34.0 bn (-3.5% MoM and -1.5% YoY) from USD 35.2 bn in Jun-24. 

1. Of the 14 key subcategories of exports, nine however, registered annualized expansion. The best performance was seen in the case of Electronic items (37.3%), followed by Miscellaneous exports (13.2%) and Plastic & rubber (8.8%). 
2. Sub-categories that weighed on exports were Petroleum products (-22.2%), Stone, plaster, cement, etc., (-21.1%) and Gems and jewellery (-20.4%). 
3. On sequential basis, in addition to Petroleum exports (-USD 0.3 bn), downside was led by Machinery (-USD 0.4 bn) and Gems & Jewellery (-USD 0.4 bn). Only 1 sub-category i.e., Agri & allied registered MoM rise in Jul-24 (USD 0.2 bn). 
4. Core exports (i.e., exports excluding Petroleum and Gems & Jewellery) moderated to USD 26.9 bn in Jul-24 from USD 27.4 bn in Jun-24.

Merchandise Imports

Merchandise imports stood at USD 57.5 bn (2.3% MoM and +7.5% YoY) vs. USD 56.2 bn in Jun-24

1. At a granular level, 9 out of 15 key import sub-categories registered annualized expansion. Strongest growth was clocked by Leather goods (100.1%), accompanied by healthy growth in Agriculture and allied items (17.6%) and Petroleum products (17.4%). 
2. Drag on imports was led by Project Goods (-73.0%), Gems & jewellery (-16.1%) and Chemicals (-12.3%).
3. Sequentially, petroleum imports eased by USD 1.2 bn in the month, to an 11-month low of USD 13.9 bn, reflecting the moderation in global oil prices from a peak of USD 89 bn (Brent Crude) in Apr-24 to ~USD 85 bn in Aug-24, so far.

Core imports rose to USD 39.0 bn in Jul-24 from USD 36.0 bn in Jun-24, with sequential rise in Electronic imports (USD 1.0 bn) along with Machinery items (USD 0.4 bn) and Agri & allied products (USD 0.3 bn) imports. 

Trade Balance

1. Sequential expansion in monthly merchandise trade deficit was driven by core deficit, even as non-core deficit eased marginally. Non-Core deficit moderated to a 6-month low of USD 11.4 bn, led by sharp reduction in Petroleum deficit.
2. Core deficit rose to USD 12.4 bn in Jul-24 from USD 8.1 bn in Jun-24, on account of increased deficit under Electronics and Miscellaneous products, while the surplus from Machinery items moderated. 

Services Trade

The estimate for services trade surplus in Jul-24 remained largely unchanged at USD 13.9 compared to USD 13.8 bn in Jun-24. Both export and imports were marginally lower on sequential basis. Looking through monthly volatility in data, services trade surplus over the last 6 months has continued to moderate lower from a peak of USD 16.2 bn in Jan-24.  This has been driven by a slowdown in services exports predominantly. While a break-up of services trade data will be available with a lag, the anticipated moderation in global growth led by US could continue to weigh on domestic services exports. 

Outlook

Incremental data is clearly pointing towards marginal expansion in India’s trade deficit on a FYTD basis. The risks of further widening remain alive amidst-

1. Geopolitics in Middle East, which continues to linger
2. Imminent elections in US and rise in associated protectionist tendencies, esp. with respect to trade with China. 
3. FY25 Union Budget lowered the custom duties on precious metal items of gold, silver, platinum, etc. to a range of 5.0-7.5% from 7.5-15.4% earlier. This could result in an upside in the gems and jewellery trade deficit in the coming months. 
4. Further, reduction in custom duties on certain electronic products (like mobile phones/ accessories, inputs for connectors/resistors) could increase the monthly momentum in import of electronic products. 
5. Having said, resilience in global demand (the IMF revised up its forecast for 2024 World trade volume growth by 30 bps to 3.0%, up from a subdued level of 0.3% in 2023) in contrast to the earlier expectation of a slowdown would play a supportive role. 
6. We hold on to our FY25 current account deficit (CAD) view of a marginal expansion to 0.9% of GDP (USD 34 bn) from USD 0.7% in FY24.

Rupee Outlook

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 remarkably stable, with just 0.4% depreciation. Over the last 2 months, incremental developments for INR have turned favourable. Foremost is the mounting expectation of commencement of monetary easing by the US Fed in Sep-24. In addition, foreign flows both FDI and FPI (primarily debt) have clocked a strong run-rate alongside a mild moderation in global commodity prices offering comfort. The favorable impact has however got partially offset by the JPY carry trade unwind triggered by the BoJ’s monetary tightening.

On the domestic front, we expect a supportive macroeconomic backdrop for INR to continue to prevail. While there could be additional tailwinds from the anticipated commencement of monetary policy easing in the US, we believe the impact would be limited as the Fed is a late entrant to the rate cutting cycle vis-à-vis its peers. We expect the RBI to diffuse appreciation pressures by sticking to its strategy for reserve accumulation in the backdrop of elevated global economic uncertainty. On a net basis, we maintain our out-of-consensus call of a mild depreciation in rupee with USDINR moving towards 84.50 levels before the end of FY25 (in contrast to the consensus view of a mild appreciation towards ~83.2 levels by end of FY25). 

Says Suman Chowdhury, Executive Director & Chief Economist “Our external position remains fundamentally strong with forex reserves at an all-time high of USD 675 bn. While the trade deficit has seen an increase in the current year due to increased domestic demand and weaker exports, it’s not likely to increase the CAD to beyond 1.0% levels in FY25. Capital inflows are expected to be higher given the interest rate cuts in many of the developed economies but given RBI’s intervention in the market and sterilization of dollars, we expect a gradual and orderly depreciation of the INR.”  

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: Trade deficit in Jul-24 was led by a sequential decline in exports, while imports rose in the month