India’s merchandise trade deficit widened to a 7-month high in May-24, to USD 23.8 bn from USD 19.1 bn in Apr-24. The deficit was 5.5% higher than the deficit recorded in May 2023, and 24.5% over that in April. This was led by a sharper sequential increase in imports vis-à-vis exports in the month.

Merchandise Exports

Merchandise exports rose significantly to USD 38.1 bn in May-24 (9.0% MoM and 9.1% YoY) from USD 35.0 bn in Apr-24 despite the ongoing disruption in shipping routes.

1. Of the 14 key subcategories of exports, 9 registered annualized expansion. The best performance was seen in the case of Plantation products (18.7%), Electronics items, and Miscellaneous products (20.6%).  
2. Sub-categories that weighed on exports were Marine products (-3.9%), Stone, plaster & cement (-3.5%), Ores & minerals (-2.4%), Gems & jewellery (-2.2%), and Leather products (-2.1%). 
3. On sequential basis, machinery exports rose by USD 1.3 bn to USD 10 bn in May-24, supported by Gems & jewellery exports that rose by USD 0.5 bn to USD 2.8 bn.
4. Core exports (i.e., exports excluding Petroleum and Gems & Jewellery) rose to USD 28.6 in May-24 from USD 26.1 bn in Apr-24, driven predominantly by an increase in Machinery exports (USD 1.3 bn).

Merchandise Imports

Merchandise imports printed at a 7-month high of USD 61.9 bn (14.4% MoM and 7.7% YoY) vs. USD 54.1 bn in Apr-24

1. At a granular level, 7 out of 15 key import sub-categories registered annualized expansion. This was led by Agri & allied products (37.5%), Transport equipment (31.9%), and Petroleum products (28.1%).
2. On the other hand, drag on imports was led by Project goods (-44.3%), Ores & minerals (-21.3%), Leather products (-20.1%), Chemicals (-7.3%), Textiles (-6.6%), and Gems & jewellery (-3.9%). 
3. Sequentially, petroleum imports rose by USD 3.5 bn to a 26-month high of USD 19.9 bn from USD16.5 bn in Apr-24. This captures the lagged impact of the spike in crude oil price in Apr-24, with Brent variant of crude averaging at USD 89 pb in Apr-24 compared to USD 80 pb in Jan-24.
4. Core imports rose to USD 36.6 bn from USD 32.7 bn in Apr-24, led by sequential increase in Transport equipment (USD 0.7 bn), Chemicals (USD 0.7 bn) and Ore & minerals (USD 0.6 bn)

Trade Balance

1. The sequential widening in monthly merchandise trade deficit was driven by both Core and Non-core deficit. 
2. Non-Core deficit widened by a sizeable USD 3.3 bn led by petroleum products, which posted their highest monthly trade deficit of USD 13.2 bn. 
3. Core deficit rose modestly by USD 1.4 bn albeit to a 6-month high of USD 8.0 bn, led by wider trade deficit on Chemicals and Miscellaneous items, though the upside was capped by a higher trade surplus in Machinery.  

Services Trade

Services trade surplus moderated further to a 10-month low of USD 12.9 bn in May-24, from USD 13.7 bn in Ap-24. The entire moderation in services trade surplus over the last 4 months from a peak of USD 16.1 bn in Jan-24 has been driven by a slowdown in services exports (-USD 3.0 bn), accompanied by an increase in services imports (USD 1.4 bn). 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 the IT sector, as suggested in the earnings commentary of the listed companies.

Outlook

Apr-24 witnessed a strong rally in commodity prices amidst escalation of geopolitical tensions, with Reuters CRB index rising by 5.1%MoM. While the index eased in May-24 by 1.2%MoM, higher commodity prices along with resilience in global growth (IMF expects global GDP growth at 3.2% in 2024 – same as in 2023) has helped keep up India’s trade performance fairly resilient despite geopolitical tensions.

Having said, some dynamics that are likely to play out in FY25 –

• Downside to crude prices is likely to be limited amidst commitments of production cut by OPEC+, geopolitical tensions along with expectations of growth in global oil demand for 2024. 
• Upside in gold prices could remain intact, amidst continued demand for the asset as a safe haven, aided by consistent central bank purchases and expectations of US rates remaining “higher for longer”.
• It appears that trough of India’s exports is well behind us, with outbound shipments likely to perform better as global growth resilience continues.  
• Though services exports have been a bright spot, some degree of stabilization at a level below its recent peak, going forward cannot be ruled out.

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 ongoing geopolitical conflict in the Middle East is a live risk and its possible impact on commodity prices needs to be watched closely for trade implications.

Rupee Outlook

INR has been remarkably stable, experiencing just 0.2% depreciation vs. the USD on FYTD basis. In contrast to market consensus/exit polls that were anticipating a significant victory for the incumbent, the NDA was able to eke out victory by garnering 292 seats to form a coalition government. Reflecting this uncertainty, the INR gave up all its exit poll gains, and created a record low of 83.57 vs. the USD last week.  Zooming out of the near-term political uncertainty, we note that India’s macroeconomic stability remains comfortable, amidst a healthy growth-inflation balance and correction in twin deficits. While this would continue to provide a stable underpinning to the INR, global factors like uncertainty on US monetary policy trajectory and geopolitical risks could result in bouts of depreciation pressure. Overall, for FY25, RBI’s penchant for reserve accumulation would tilt the balance in favour of a mild depreciation. We maintain our call of USDINR moving towards 84.50 levels by Mar-25. Persistent overvaluation of rupee on REER basis and any further delay in Fed’s monetary policy pivot could potentially tilt the balance in favour of further weakness. 

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: Widening of the trade deficit in May-24 was driven by both Core and Non-Core deficit