India’s merchandise trade deficit narrowed to USD 21.0 bn in Jun-24 from USD 23.8 bn in May-24. This was driven by a sharper sequential decline in imports vis-à-vis exports in the month.

Merchandise Exports 

Merchandise exports moderated to USD 35.2 bn (-7.7% MoM and +2.6% YoY) from USD 38.1 bn in May-24. 

1. Of the 14 key subcategories of exports, 8 registered annualized expansion. The best performance was seen in the case of Plantation products (47.0%), Electronics items (16.9%), and Ores and minerals (11.1%).  
2. Sub-categories that weighed on exports were Petroleum products (-18.3%), Miscellaneous items (-16.6%) and Marine products (-7.7%). 
3. On sequential basis, in addition to Petroleum exports (-USD 1.7 bn), downside was led by Machinery (-USD 0.6 bn) and Gems & Jewellery (-USD 0.5 bn). None of the export sub-categories registered a month-on-month increase in Jun-24. 
4. Core exports (i.e., exports excluding Petroleum and Gems & Jewellery) declined to USD 27.4 bn in Jun-24 from USD 28.6 bn in May-24 driven predominantly by Machinery, along with agriculture and allied products.

Merchandise Imports

Merchandise imports stood at USD 56.2 bn (-9.3% MoM and +5.0% YoY) vs. USD 61.9 bn in May-24

1. At a granular level, 10 out of 15 key import sub-categories registered annualized expansion. This was led by Project goods (31.4%), Base metals (29.9%), Petroleum products (19.6%) and Agri and allied products (18.3%).
2. On the other hand, drag on imports was led by Gems & jewellery (-30.1%), Leather products (-17.4%), Ores & minerals (-11.6%) and Chemicals (-11.3%).
3. Sequentially, petroleum imports eased by USD 4.9 bn in the month, to a 6-month low of USD 15.6 bn, possibly reflecting the moderation in global Brent crude oil price from a peak of USD 89 bn in Apr-24 to USD 83 bn in Jun-24. 
4. Core imports slipped marginally lower to USD 36.0 bn from USD 36.6 bn May-24, with a sequential decline in Transport equipment (USD 1.1 bn) being offset by a rise in Machinery items (USD 0.5 bn) and Base metals (USD 0.3 bn) imports. 

Trade Balance

1. The sequential contraction in monthly merchandise trade deficit was driven by Non-core deficit, even as core deficit rose marginally. 
2. Non-Core deficit moderated to a 5-month low of USD 12.4 bn from USD 15.8 bn in May-24, led by sharp narrow down in Petroleum deficit although it expanded on an annualized basis. 
3. Core deficit rose slightly to USD 8.6 bn in Jun-24 from USD 8.0 bn in May-24, on account of expansion of Electronics trade deficit, while the surplus from Machinery items and Agriculture products moderated. 

Services Trade

Services trade surplus in Jun-24 remained stable at USD 13.0 bn – same level as in May-24. Both export and imports were marginally up. Looking through monthly volatility in data, services trade surplus over the last 6 months has continued to moderate lower from a peak of USD 16.1 bn in Jan-24.  This has been driven by a slowdown in services exports (-USD 0.7 bn), accompanied by an increase in services imports (USD 2.5 bn) over the same period. While a break-up of services trade data will be available with a lag, Balance of Payments data for Q4 FY24 indicated slowdown in business services exports, even as IT services exports continued to remain stronger than expected. 

Outlook

While India’s merchandise trade deficit has seen a material expansion in Q1 FY25 vs Q4FY24, it is also true that exports have held up well on an annualized basis. The resilience in global economy, as validated by upgrade to global growth outlook by IMF, is also getting reflected in trade flows for India as well as other economies. As per UNCTAD, global trade trends turned positive in Q1-24 after contracting in 2023. The value of trade in goods and services increased sequentially by about 1.0% and 1.5% respectively, led by China, India and US.

Having said that, some dynamics that remain close on watch include -

• Geopolitics in Middle East, which continues to keep volatility in crude oil prices intact. Notably, the Apr-24 rise in crude oil prices led to increase in Russia’s share in India’s imports to an all-time high of 11.5% in May-24. 
• Upside in gold prices could remain intact, amidst continued demand for the asset as a safe haven, aided by consistent central bank purchases. 
• Uncertainty with respect to impending elections in US due in Nov-24, and the accompanying rise in trade protectionism. 
• Past global monetary tightening weighing on pace of global growth. As such, some degree of stabilization in services exports below recent peak can be anticipated. 

We hold on to our FY25 current account deficit view of a marginal expansion to 0.9% of GDP (USD 34 bn) from USD 0.7% in FY24.

Rupee Outlook

Says Suman Chowdhury, Chief Economist and Head- Research “The narrative on INR has remained has been consistent despite the underlying shifts in global FX market. An extremely mild depreciation accompanied by remarkably low volatility seems to have become a hallmark for INR. India’s macroeconomic stability remains comfortable, as attested by the lower CAD levels (<1%), favourable Q4 FY24 BoP data and the likelihood of a faster fiscal consolidation in FY25 post the record high transfer of RBI dividend. Further the foreign portfolio flows in debt are set to increase in the current year due to the inclusion of the Indian sovereign bonds in the JP Morgan bond indices. While this would continue to provide a stable underpinning to the INR, global factors like uncertainty on the US monetary policy trajectory and geopolitical risks could result in bouts of depreciation pressure. Overall, for FY25, RBI’s penchant for reserve accumulation and INR’s persistent overvaluation on REER basis, would tilt the balance in favour of a mild depreciation. We maintain our call of USDINR moving towards 84.50 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: Exports have held up well, led by broad-based uptick across sub-categories