India’s merchandise trade deficit narrowed to an 11-month low of USD 15.6 bn in Mar-24, from USD 18.7 bn in Feb-24, led by a sequential contraction in imports even as exports remained largely steady in the month.

Merchandise Exports

Merchandise exports rose marginally in Mar-24 to USD 41.7 bn (0.7% MoM and -0.7% YoY) compared to USD 41.4 bn in Feb-24. In absolute terms, while this marked the highest level of exports in 12 months, annualized growth slipped into contraction once again after a hiatus of 3 months.

1. Core exports (i.e., exports excluding Petroleum and Gems & Jewellery) rose to a record high of USD 33.7 bn from USD 30.0 bn in Feb-24, driven by increase in export of Machinery (USD 1.3 bn), Chemicals (USD 1.1 bn), and Electronics (USD 0.5 bn). 
2. Of 14 key subcategories of exports, 9 registered annualized expansion which is an encouraging trend despite the global trade headwinds. The best performance was seen in the case of Miscellaneous export items (128%), Electronics (23.1%), Plantation (36.3%), Chemicals & Products (26.8%), Rubber & Plastic (11.2%) and Machinery items (10.7%). 
3. Drag on exports in annualised terms was led by Petroleum products (-35.4%), Marine Products (-22.2%) and Ores & minerals (-12.2%)
4. On sequential basis, weighing on total outbound shipments, petroleum exports slipped to an 8-month low of USD 5.4 bn in Mar-24 from USD 8.2 bn in Feb-24. 

Merchandise Imports

Merchandise imports stood at USD 57.3 bn in Mar-24 (-4.7% MoM and -6.0% YoY) vs. USD 60.1 bn in Feb-24 

1. Core imports actually rose to USD 35.2 bn in Mar-24 from USD 33.2 bn in Feb24, led by sequential increase in Electronics (USD 0.4 bn) and Transport equipment (USD 0.3 bn).
2. Sequentially, petroleum imports rose marginally to a 5-month high of USD 17.2 bn in Mar -24 from USD 16.9 bn in Feb-24, reflecting the increase in crude oil prices. 
3. But on the other hand, gems and jewellery mean reverted to USD 4.8 bn in Mar-24, after recording a spike to USD 10.1 bn in Feb-24, as high global prices are likely to have weighed on domestic demand. 
4. At a granular level, 5 of the 15 sub-categories registered an annualised expansion. Project goods clocking a growth of 166.2%YoY emerged as the best performer.
5. Drag on imports was led by Leather Products (-25.7%), Gems & Jewellery (-24.3%), Chemicals & Products (-21.1%), Plastic & Rubber (-19.9%), Textiles (-12.0%), and Transport Equipment (-10.7%).

Trade Balance

1. The sequential narrowing in monthly merchandise trade deficit was led by both Core and Non-core goods.  
2. Non-core deficit narrowed from USD 15.5 bn in Feb-24 to USD 14.1 in Mar-24. The sharp widening in petroleum trade deficit (by USD 3.2 bn) was more than offset by correction in Gems & jewellery trade deficit (USD 4.7 bn).
3. In contrast, Core deficit narrowed from USD 3.2 bn in Feb-24 to USD 1.5 bn in Mar-24, owing to widening of trade surplus of Machinery (by USD 1.3 bn) and Chemicals (by USD 0.9 bn). 
4. The monthly surplus under chemicals scaled a new peak (USD 2.8 bn) while that for Machinery rose to a 2-year high (USD 6.7 bn). 

Services Trade

Services trade surplus moderated further to an 8-month low of USD 12.7 bn in Mar-24, from USD 13.1 bn in Feb-24 (revised lower from USD 16.8 bn as per preliminary estimates). The entire moderation in services trade surplus over the last 2 months has been driven by a slowdown in services exports, even as imports have remained largely stable. While a break-up of services trade data will be available with a lag, it is most likely that the ongoing slowdown in exports is being led by IT sector.

CAD Outlook

In FY24, the merchandise trade deficit moderated to USD 240 bn from USD 265 bn in FY23. The moderation was primarily driven by Chemical products, Ores & minerals, Petroleum products, and Agri & allied products. While softening of global commodity prices did facilitate the decline in trade deficit, the waning of supply bottlenecks and strength in global demand offered support to exports along with.

We hold on to our FY24 current account deficit estimate of 0.8% of GDP (USD 28 bn). For FY25, while we maintain our current account deficit forecast at 1.0% of GDP, the recent hardening of commodity prices (esp. crude oil and precious metals) could potentially exert an upside risk. Ongoing and escalating geopolitical conflict in the Middle East is material risk that remains on close watch.

Rupee Outlook

 The INR clocked a mild depreciation of 1.5% against the USD in FY24. This was accompanied by subdued volatility, both from a historical perspective, as well as compared to key currency peers across the DM and EM FX space. Our baseline view for FY25 mirrors the outturn in FY24, i.e., the likelihood of a mild depreciation accompanied by subdued volatility. While improvement in India’s underlying macro-stability parameters would favor a stable currency with a mild appreciation bias, in recent weeks, global factors have turned adverse on the margin:

• Resilience in US economic data has pushed back expectations of a Fed pivot in Jun-24, thereby buoying the USD
• Escalation of geopolitical uncertainty is providing an upside to both crude oil prices and the USD

This is likely to put some pressure on INR in the near term. We believe INR’s overvaluation, and RBI’s penchant for reserve accumulation on the back of an anticipated BoP surplus in FY25 would provide a band of stability for rupee. Overall, we maintain our call of USDINR moving towards 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

Says Suman Chowdhury, Chief Economist and Head-Research “India’s merchandise trade deficit has improved by around USD 15 bn in FY24 vs FY23 and along with a higher net services surplus of USD 23.6 bn has contributed to a significantly lower CAD which we estimate at USD 28 bn or 0.8% of GDP in the last fiscal. The external position for Indian remains robust with a significant accretion to foreign exchange reserves. However, the continuing uncertainty with regard to rate cuts by Fed and the escalating geo-political risks have made capital flows quite volatile and put the INR under some pressure in the short term. We expect the currency to undergo a mild depreciation in FY25 and stay in a band of 83.5 – 84.5 in the current fiscal.”   

Chart 1: Geopolitical conflict in Middle East and OPEC’s decision to continue with output cuts has led to a sharp increase in crude oil prices in Apr-24