India’s merchandise trade deficit moderated to USD 21.9 bn in May-25 from USD 26.4 bn in Apr-25. On a sequential basis, this was driven by a contraction in imports, even as exports posted a modest expansion. 

Merchandise exports

Merchandise exports clocked USD 38.7 bn in May-25 (+0.6% MoM and -2.2% YoY) vis-à-vis USD 38.5 bn in Apr-25. 

• Out of 14 key sub-categories of exports, 8 registered annualized expansion. 
• The strongest performance was seen in Electronics, Marine products, Chemicals, Leather, and Plantation products. In contrast, there was a drag on account of Petroleum products, Gems & jewellery and Ores & minerals. 
• Electronic goods exports scaled a fresh monthly high of USD 4.6 bn in May-25.
• Core merchandise exports (i.e., exports excluding Petroleum and Gems & Jewellery) rose to USD 30.7 bn in May-25 from USD 28.6 bn in Apr-25.

Merchandise imports

Merchandise exports clocked USD 60.6 bn in May-25 (-6.6% MoM and -1.7% YoY) vis-à-vis USD 64.9 bn in Apr-25. 

• Out of 15 key sub-categories of imports, 10 registered annualized expansion. 
• The strongest performance was seen in Project goods, Chemicals, Textiles, Electronic items, Machinery items, Base Metals, Optical, medical & surgical instruments, and Leather goods. There was drag coming from Transport equipment, Petroleum products, Ores & minerals and Gems & jewellery items.
• Imports of Chemicals & products along with Machinery items scaled a fresh monthly high of USD 7.0 bn and USD 5.6 bn respectively 
• Core merchandise imports (i.e., imports excluding Petroleum and Gems & Jewellery) rose to a 4-month high of USD 41.2 bn in May-25 from USD 39.3 bn in Apr-25.

Merchandise trade balance

The sequential moderation in the merchandise trade deficit in May-25 was driven primarily by just two items – Petroleum products and Electronic goods – the deficits under these categories printed at a 3-month low of USD 9.1 bn and USD 4.5 bn respectively. There was some partial offsetting impact from Chemicals and products (usually swings between a monthly surplus and deficit), with the deficit under this category touching its highest ever magnitude of USD 1.9 bn.

Services trade

The commerce ministry’s estimate for services trade surplus for May-25 stood at USD 15.3 bn, marginally lower compared to USD 15.9 bn in Apr-25. Lower surplus is estimated to have been on account of a sequential decline in services exports (-1.4% MoM), even as services imports registered an expansion (+1.4% MoM).

Notwithstanding the moderation in May-25, the FYTD momentum in services trade surplus remains healthy – it stood at USD 31.2 bn during Apr-May FY26, up from USD 26.2 bn in the corresponding period in FY25.

Services trade surplus has continued to provide strength and stability to India’s current account over the last few years. The push for digitisation post-COVID, accompanied by the proliferation of Global Capability Centres, has helped to diversify exports beyond the traditional IT services. In addition, the global services trade has also remained outside the spectre of the US tariff threat.

Outlook

The months of Apr-May 2025 saw unprecedented uncertainty on external trade as the US administration under President Trump attempted to shift the global trade dynamics by imposing/or threatening to impose unilateral tariffs on the rest of the world. Since the announcement of reciprocal tariffs by US President Trump on April 2^nd, the near-term global trade outlook has witnessed gyrations following the unpredictable, and sometimes ambiguous communication pertaining to tariffs and trade.

Amidst this elevated global uncertainty, India’s merchandise export performance depicted resilience – headline exports expanded by 3.1% over Apr-May FY26 compared to the corresponding period in FY25 – core exports posted a relatively healthier performance, expanding by 8.4% during the above period. 

• With the temporary 90-day tariff suspension window in place (until July 9^th), it is likely that front-loading of shipments by Indian exporters for the US played a role in this.
• We note that the share of the US in India’s merchandise exports jumped to 22.3% during Apr-May 2025, up from 18.9% in the corresponding period in 2024.
• In contrast, India’s merchandise exports, excluding the US, registered a minor contraction of 1.2% YoY during Apr-May 2025.

It would be reasonable to assume that this trend will manifest in the trade statistics for Jun-25 as well. Thereafter:

• The much anticipated India-US Bilateral Trade Agreement – the first part of which is expected to be announced by July 8^th – will shape the export outlook pertaining to the US.
• The expectation of a slowdown in global demand conditions could weigh upon India’s export performance in general.

On imports, while the impact of lower oil prices (India Crude Basket eased from USD 76 pb in Mar-25 to USD 63-64 pb in Apr-May 2025) helped in narrowing the headline merchandise trade deficit in May-25, its durability needs to be assessed amidst the escalation of the Israel-Iran conflict. While market reaction has been measured so far, with India Crude Basket trading close to USD 72-73 pb levels, geopolitical uncertainty with respect to oil supply remains unresolved.

Looking ahead, global geopolitics and geoeconomics will determine the course of India’s external trade – the uncertainty band surrounding the trade outlook is likely to remain unusually wide. We retain our FY25 and FY26 current account deficit forecast of 0.7% and 0.8% of GDP for now. The forecast for FY26 would be reassessed after the announcement of the India-US BTA in Jul-25.

Rupee outlook

After two back-to-back months of appreciation, the Indian rupee posted a modest depreciation of 0.5% in May-25 vs. the US dollar. The month of Jun-25 so far has witnessed an extension of this trend, with INR losing 0.7% vs. the USD. Having said, the INR continues to remain a balanced performer against the USD with a modest depreciation of 0.5% since the announcement of reciprocal tariffs by the US administration on Apr 2^nd.

The broader theme of USD weakness continues to dominate the global FX market sentiment amidst heightened policy uncertainty in the US. Currencies like the CHF and EUR have seen the maximum strength against the USD amongst DM currencies, while RUB and KRW have posted strong performance amongst EM currencies.

While USD continues to see erosion of its safe haven appeal, the bearish market positioning is getting stretched – this could potentially reverse in the short-term, hopefully dovetailing with ebbing of heightened trade uncertainties by Sep-25. US Fed’s wait-and-watch approach, in contrast to other key central banks that have eased monetary policy in recent months, could also provide a minor tailwind to the USD.

Meanwhile, INR could enjoy strategic gains in the near term on account of recent slide in inflation and front loading of exports to the US. However, we believe this to be transitory, and likely to be actively defended by RBI intervention to recoup reserves. We maintain our medium-term call of moderate weakness in the INR and expect it to drift towards 89.50 by Mar-26 for now. The same will be reviewed once clarity emerges on the much-anticipated India-US trade agreement.

Table 1: Highlights of India’s trade balance*