India’s merchandise trade deficit widened sizeably to USD 27.1 bn in Oct-24 from USD 20.8 bn in Sep-24. This was driven by a sharper sequential jump in imports vis-à-vis exports, accompanied by a widening of the petroleum deficit to a record high and a seasonal expansion in the gems & jewellery deficit due to a festive demand uptick.

Merchandise Exports

Merchandise exports rose sharply to USD 39.2 bn in Oct-24 (+13.4% MoM and +17.3% YoY) versus USD 34.6 bn in Sep-24.

1. Of the 14 key subcategories of exports, 12 registered annualized expansion. The best performance was seen in the case of Electronic items (45.7%), Machinery items (39.4%) and Agri & allied products (33.1%).
2. In the Agri export category, Rice saw a significant increase (+85.9% YoY, +51.3% MoM) primarily due to the lifting of the ban on exports of non-basmati white rice, which had been imposed in July 2023. 
3. On the other hand, sub-categories that weighed on exports were Petroleum products (-22.0 %YoY) and Stone, plaster and cement (-6.1YoY%)
4. On a sequential basis, the upside was led by Electronic items and Machinery items, both of which rose by USD 1.4 bn each.  
5. Core exports (i.e., exports excluding Petroleum and Gems & Jewellery) rose to USD 31.4 bn – i.e., the highest level in 7 months, from USD 27.0 bn in Sep-24.

Merchandise Imports

Merchandise imports rose to a record high of USD 66.3 bn in Oct-24 (+19.8% MoM and +3.9% YoY) from USD 55.4 bn in Sep-24.

1. At a granular level, 10 out of 15 key import sub-categories registered annualized expansion. The strongest growth was clocked by Textiles (43.6%) and Agriculture and allied products (38.8%). 
2. On a month-over-month basis, Fertilisers, Crude & manufactured goods (+69.1%), Gold (+62.1%), Vegetable Oil (+35.6%), Metalliferous ores & other minerals (+26.9%) led the charge. 
3. Gold imports rose by USD 2.5 bn due to seasonal increase as the festive and wedding season sets in. While the demand surge triggered by the import duty cut and festive demand had initially spiked sales, it has since been tempered by record-high gold prices. Gold imports declined by 1.4% YoY. 
4. Petroleum, Crude & products posted an increase of 13.4% YoY and a sequential increase of 45.9%.
5. Core imports rose by USD 2.7 bn in Oct-24 to an absolute level of USD 39.2 bn.

Trade Balance

1. Sequential deterioration in the monthly merchandise trade deficit was driven by the Non-core deficit – which rose by USD 8.0 bn.
   1. Within the Non-core deficit, the petroleum deficit rose to a record high (of USD 13.7 bn), accompanied by a seasonal widening in the gems & jewellery deficit.
2. On the other hand, the Core deficit narrowed by USD 1.6 bn to a 5-month low of USD 7.8 bn in Oct-24, led by Electronics and Machinery items.

Services Trade

The estimate for services trade surplus in Oct-24 rose to a record high of USD 17.0 bn compared to an upwardly revised USD 16.1 bn in Sep-24. Exports rose on a sequential basis, at a faster clip compared to imports. In absolute terms, exports surged to an all-time high of USD 34.0 bn in Oct-24.

Looking through monthly volatility in data, the services trade surplus, after moderating in the initial months of the CY24, has shown an improvement in recent months. This has been driven by a pick-up in services exports, which rose to a record high in October 24. Diversification of services exports beyond the traditional IT services continues to prevail, with post-Covid acceleration in new GCC (global capability centres) investments that continue to diversify the export of services.

Outlook

The monthly merchandise trade deficit has seen two elevated prints in recent months, i.e., in Aug-24 and Oct-24. While the recent print was driven by higher imports of petroleum products, the Aug-24 was owing to imports of gems and jewellery (owing to the reduction in import duties announced in the Budget).

1. The trade deficit on account of gems and jewellery now appears to have normalized. The marginal spike in Oct-24 should be seen as a seasonal upside owing to the festive season, with elevated global prices also exerting an impact. 
2. The record monthly high for the petroleum trade deficit in Oct-24 is somewhat perplexing as international crude oil prices have been fairly range bound. 
3. However, India’s heavy reliance on imported crude oil makes its economy vulnerable to fluctuations in global oil prices. While the government aims to reduce this reliance, sluggish growth in domestic oil production adds to the pressure. 

In its Oct-24 outlook, WTO revised its estimate of merchandise trade volume growth for CY24 to 2.7% (from 2.6% earlier. However, for CY25, the estimates were revised lower to 3.0% (vs. earlier 3.3%). The report also cited a possibility of downside risks amidst the ongoing geopolitical tensions and increased economic policy uncertainty. Since then, global trade risks have further escalated with Trump winning the US Presidential elections. Trump, during his election campaign, had announced his intention to impose universal as well as targeted tariffs on most countries (60% tariffs on all imports from China, 25-100% tariffs on all imports from Mexico, and 10-20% tariffs on all imports from other countries). If and when implemented, this is bound to stoke retaliatory action by partner countries and trigger tariff wars. On a net basis, such an outcome can be expected to escalate global economic uncertainty and prove detrimental to global trade activity over the medium to long run.

Amidst the FYTD expansion in trade deficit (to USD 165 bn vs. USD 150 bn over the same period last FY), we continue to maintain our current account deficit (CAD) forecast of 1.2% of GDP vs. 0.7% in FY24. Risks associated with the new tariff policy of the US government will be assessed for potential impact in the next fiscal year.

Rupee Outlook

The Indian rupee touched a fresh all-time low in Nov-24 and is currently trading close to 84.40 levels. The recent weakness in INR is not due to idiosyncratic factors but reflects broad-based strength in the USD, which started taking root since the beginning of Oct-24 amidst a positive undertone in US economic data. In addition, the US presidential election outcome in Nov-24 is seen to be adding wind to the USD’s sail in recent days. We expect the USD to remain resilient/ moderately strong in the near term as expectations with respect to the Fed’s monetary easing over the course of the cycle get dialled down. The likelihood of an increase in global economic uncertainty could also be supportive of the USD in the near term.

However, these factors are unlikely to be durable - US debt sustainability will eventually come under scrutiny, while the weaponization of foreign-cum-trade policy could potentially fan a faster de-dollarization drive globally. Although India is expected to benefit marginally from the imposition of relatively steep tariffs on China, one needs to monitor risks on remittances and foreign investment flows.

Meanwhile, the Reserve Bank of India (RBI) has been actively intervening in the foreign exchange market by selling dollars to support the currency with its forex reserves, currently standing close to USD 675.65 billion, its lowest in the last three months. On a net basis, while we continue to maintain our USDINR forecast of 84.50 for the end of FY25, we acknowledge the build-up of upside risks in the near term associated with Trump’s re-election.

Says Suman Chowdhury, Chief Economist and Executive Director, Acuité Ratings & Research “The global trade outlook has turned a bit uncertain for CY2025 amidst the expectation of a new tariff regime in US and the risks of tariff wars. While the export pickup in Oct-24 has been encouraging, its sustainability needs to be seen. Meanwhile, the trade deficit and the CAD for India are set to be higher in the current fiscal primarily on the back of higher crude oil and gold imports. Despite the softness in global prices of crude oil, India’s oil import bill has been higher YoY in Apr-Oct’24 possibly due to drop in discounts and lesser share of Russian oil. On the other hand, gold imports have reached a new high of USD 34.3 bn USD in Apr-Oct’24 driven by higher prices. Although services exports have seen a steady growth, CAD is set to rise to 1.2% in FY25 due to the higher trade deficit. The volatility in the INR is likely to increase in the near term amidst a stronger dollar and uncertain capital flows. There are upside risks to our existing forecast of 84.5 INR/USD 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: Oct-24 widening of trade deficit led by petroleum and gems & jewellery