India's merchandise trade deficit narrowed by a marginal USD 0.2 bn to USD 28.2 bn in May-26 vis-à-vis Apr-26. This was a result of a sequential increase in exports largely matched by a concomitant increase in imports. 

Merchandise exports

Merchandise exports clocked the highest level on record at USD 45.2 bn in May-26 vis-à-vis USD 43.6 bn in Apr-26. (+3.8% MoM and +18.0% YoY).

• Out of 14 key sub-categories of exports, 8 registered an annualized expansion with strong double-digit gains led by Petroleum products (54.9%), Machinery (24.5%), Miscellaneous goods (23.9%), Plastic & Rubber (21.8%), and Electronics (11.6%). 
• In contrast, 6 sub-categories emerged as growth laggards, namely, Plaster & Cement (-26.8%), Textiles, Leather (each at -6.8%), Plantation products (-0.4%), Marine products, and Ores & Minerals (each at -0.3%). 
• Core merchandise exports (i.e., exports excluding Petroleum and Gems & Jewellery) jumped to a 14-month high of USD 34.2 bn in May-26 (vs USD 31.6 bn in Apr-26) while remaining 12.3% higher on a YoY basis. 

Merchandise imports

Merchandise imports jumped to USD 73.4 bn in May-26 vis-à-vis USD 71.9 bn in Apr-26, clocking their second-highest level on record since the peak observed in Oct-25. (+2.0% MoM and +20.6% YoY).

• Out of 15 key sub-categories of imports, 11 registered annualized expansion, including 8 with double-digit gains. 
• These were led by Petroleum products (53.8%), Electronic items (35.5%), Agri & Allied products (30.4%), Ores & Minerals (21.6%), Plastic & Rubber (16.0%) and Optical, Medical and Surgical Instruments (11.6%) among others. 
• The annualized drag was confined to Project goods (-64%), Chemicals & products (-23.8%), Paper & related products (-5.2%) and Gems & Jewellery (-0.8%).
• Core merchandise imports (i.e., imports ex Petroleum and Gems & Jewellery) rose to a fresh record monthly high of USD 46.1 bn in May-26, compared with USD 45.9 bn in Apr-26.
• Non-core imports jumped to a 4-month high of USD 27.3 bn (+40.7% YoY) vis-à-vis USD 26.1 bn in Apr-26. 
  1. This was solely led by a rise in Petroleum imports to their highest level on record at USD 22.7 bn vis-à-vis USD 18.6 bn in Apr-26.
  2. Meanwhile, Gems & Jewellery import bill fell to an 11-month low of USD 4.6 bn vis-à-vis USD 7.4 bn in Apr-26. 

Merchandise trade balance

The merchandise trade deficit in May-26 was broadly unchanged as a larger deficit in the non-core segment was offset by a commensurate fall in the core deficit.

• Non-core trade deficit widened to USD 16.4 bn from USD 14.2 bn in Apr-26, entirely owing to a wider oil deficit. Elevated global crude prices kept the Indian Crude Basket (ICB) at an average level of USD 106 pb in May-26, even as net import volumes of crude oil and petroleum products are likely to have moderated. 
• Core trade deficit narrowed to USD 11.9 bn from USD 14.2 bn in Apr-26, driven primarily by a widening of the surplus in Machinery goods and aided by a narrowing of the deficit in Miscellaneous goods and Electronics.

Services trade

• The commerce ministry’s estimate for services trade surplus for May-26 moderated to USD 17.7 bn from USD 18.6 bn in Apr-26. 
• Historically, India's services trade surplus has been a key source of stability for its current account, rising to 5.5% of GDP in FY26 from 5.0% in FY25.

Inferences and outlook

From a geographical perspective, May-26 trade data reflected the following:

• For the second straight month, non-US markets remained the primary driver of export growth (+23.4% YoY), underpinned by sustained triple-digit expansion in shipments to Sri Lanka, Tanzania and Singapore. Additionally, exports to Malaysia, South Africa, Hong Kong and Vietnam also recorded strong gains ranging between 45-65%. 
• While the level of exports to the US continued to trend higher for the 4^th month, they remained broadly flat on a YoY basis. This was also mirrored in the tempering pace of manufacturing new export orders, to a 3-month low. 

On the geopolitical front, after an exceptionally turbulent 3½ month-phase marked by six weeks of armed conflict, a tenuous ceasefire with intermittent escalations and intense volatility across energy markets, the long-awaited US–Iran peace agreement appears to have finally come through. 

With the formal signing of the peace deal on 19^th Jun-26 expected to pave the way for the reopening of the Strait of Hormuz, markets have started unwinding the geopolitical risk premium built into oil prices.

• Brent crude, in a sharp knee-jerk correction, fell to ~USD 83 pb on 15^th Jun-26, extending the downward trend that had already pushed prices to sub USD 95 pb levels in early Jun-26. 
  1. Further, a moderation in freight costs (Baltic dirty tanker index -24% MoM in May-26) is likely to alleviate pressure on India’s oil import bill.
  2. Meanwhile, successive increases in retail fuel prices since May-26, alongside state-led fuel conservation measures, are likely to induce some moderation in fuel consumption (volumes) and thereby help contain pressure on the current account. 
• Nevertheless, second-order effects via broader input cost pressures could continue to put upward pressure on the import bill in the coming months. For context:
  1. The IMF Primary Commodities Index rose by 34% YoY in May-26, reflecting strong gains across fertilizers (+24% YoY) and metals (+32% YoY). In line with these trends, imports of fertilizers and non-ferrous metals rose by 28% and 25% on a YoY basis in May-26. 
  2. Core WPI inflation (excluding food, beverages, and fuel items), based on the new 2022–23 series, extended its uptrend since Nov-25, reaching a record-high of 7.9% YoY in May-26. Ceteris paribus, rising cost pressures for exporters, if translated into higher output prices, could potentially undermine India’s export competitiveness going forward. 
• Meanwhile, spillovers from strained energy markets have dimmed global demand prospects, which could impart a negative impulse for export growth.
  1. In its Jun-26 Economic Outlook, the OECD projected global growth to moderate to 2.8% in CY26 from 3.4% in CY25 under a baseline scenario assuming crude oil prices of ~USD 92 pb for 2026. 
  2. The Goods Trade Barometer, a leading indicator of global merchandise trade, moderated to 101.7 from 102.3 in Jan-26, suggesting that growth in global trade volumes may have begun to temper.
  3. In addition, the prospect of additional 12.5% tariffs on 60 global partners brings fresh uncertainty to the global trade outlook.

Nonetheless, against a relatively favourable global backdrop hereon, several tailwinds on the trade and domestic policy fronts remain at play.

• The India–US trade agreement, now in the offing, alongside the likely operationalisation of recently concluded FTAs with the EU, UK and New Zealand over the coming quarters, should impart further traction to India’s export trajectory. 
• Amid a third consecutive month of correction in international gold prices (-3.0% MoM in May-26), government measures via higher import duties on gold and silver, and a 100 kg cap on duty-free gold imports, may have incrementally aided the decline in gold import bill in May-26 (-39.3% MoM). With precious metals accounting for a sizable share of India's merchandise trade deficit (~22% in FY26), these measures could continue to provide relief to the overall import bill in the months ahead. 
• In parallel, improving global risk sentiment, alongside the RBI's recent combination of structural and temporary measures to attract foreign capital, should help alleviate pressures on the INR (-5% over Mar-May-26), thereby lending support to both current and capital accounts. 

Assuming an average crude oil price of USD 95 pb in FY27, we project India’s current account deficit at 1.8% of GDP, up from 0.6% in FY26. Having said, the outcome of the US-Iran peace deal will be monitored for its impact on commodity prices, which in turn will shape our forecast trajectory.

Table 1: Highlights of India’s trade balance*

*Note: Numbers may not add up due to rounding off and revisions in headline exports and imports

Chart 1: India’s stable trade deficit in May-26 masks a wider non-core oil deficit