India’s merchandise trade deficit narrowed sharply to a 5-month low of USD 20.8 bn in Sep-24 from USD 29.7 bn in Aug-24. This was driven by a sharp sequential correction in imports while exports remained almost unchanged compared to the previous month.

Merchandise exports

Merchandise exports stood at USD 34.6 bn in Sep-24 (-0.4%MoM and +0.5% YoY) versus USD 34.7 bn in Aug-24. 

1. Of the 14 key subcategories of exports, nine registered annualized expansion. The best performance was seen in the case of Miscellaneous items (48.1%), Plantation products (41.8%), Plastic and rubber (28.3%) and Agri & allied products (18.5%).
2. On the other hand, sub-categories that weighed on exports yet again were Petroleum products (-26.7%), Ores and minerals (-24.6%), Marine products (-16.1%) and Gems and jewellery (-11.5%). 
3. On a sequential basis, the upside in Gems & jewellery (USD 0.8 bn) and Machinery exports (USD 0.4 bn) was offset by the decline in Petroleum exports of an equal magnitude. 
4. Core exports (i.e., exports excluding Petroleum and Gems & Jewellery) rose marginally to USD 27.0 bn in Sep-24 compared to USD 26.8 bn in Aug-24

Merchandise Imports

Merchandise imports moderated to USD 55.4 bn in Sep-24 (-14.0% MoM and +1.6% YoY) from a record monthly high of USD 64.4 bn in Aug-24. 

1. At a granular level, 10 out of 15 key import sub-categories registered annualised expansion. The strongest growth was clocked by Project goods (107.9%), Textiles (37.5%) and Machinery items (18.5%).
2. Drag on imports was led by Leather and leather products (-16.6%), Agri products (-10.9%) and Plastic and rubber articles (-8.8%).
3. Sequentially, the correction was predominantly led by Gems and Jewellery imports, which moderated by USD 6.4 bn in a normalisation post the spike seen in Aug-24 on account of the reduction in customs duties on Gold and Silver announced in the Union Budget in Jul-24.
4. Barring petroleum imports, which rose sequentially (USD 1.5 bn), all other import sub-categories witnessed a decline in September 24. Adding to the downside led by Gems & jewellery were sub-categories of Machinery, Electronic goods, Base metals, Ores & minerals etc. 
5. As such, core imports fell sizeably by USD 4.2 bn in Sep-24 to an absolute level of USD 36.5 bn.

Trade Balance

1. Sequential moderation in the monthly merchandise trade deficit was driven by both Core and Non-core deficits – of an equal magnitude.
2. Core deficit eased by USD 4.4 bn to USD 9.5 bn in Sep-24, led by Miscellaneous items, Machinery items, and Ores & minerals. 
3. Non-core deficit also moderated by USD 4.4 bn to USD 11.3 bn in Sep-24, of which USD 3.5 bn was solely on account of Gems & Jewellery.

Services Trade

The estimate for services trade surplus in Sep-24 rose to an 8-month high of USD 14.3 bn compared to USD 13.9 bn in Aug-24. Exports rose on a sequential basis, while imports drifted lower yet again. In absolute terms, exports were at an 8-month high of USD 30.6 bn.

Looking through monthly volatility in data, the services trade surplus, after moderating in the initial months of the CY24, has shown a marginal improvement recently. This has been driven by a pick-up in services exports, that more than offset the upside in imports. Diversification of services exports beyond the traditional IT services continues to prevail, with post-Covid acceleration in business and financial services through Global Capability Centres (GCCs).

Outlook

From a broader perspective, the past few weeks have seen some positive and not-so-positive developments on the trade front. 

1. It stands validated that the spike in imports of precious metals in Aug-24 to a record monthly high was a one-off owing to the reduction in customs duties announced in the Budget. With imports having normalized in Sep-24, the downside may have also been led by global prices scaling to a record high, as Sep-24 saw an inauspicious period of buying (called the ‘shradh’ period in Hindu calendar). With the festive and wedding season concentrated in Q3 FY25, accompanied by elevated gold prices, a clearer picture and direction on imports of precious metals would emerge in the coming months.
2. In its Oct-24 outlook, WTO estimates the global merchandise trade volume to grow by 2.7% (from the earlier 2.6%) this year (CY24). 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.
3. Crude oil prices have remained volatile amidst the ongoing geopolitical disruptions in the Middle East.  
4. The downside in Sep-24 core imports may be yet another indicator (latest prints of PMI, GST collections, IIP and core have seen some moderation) of weakening domestic demand. This needs to be watched more closely.
5. Imminent elections in the U.S. and the risk of a rise in associated protectionist tendencies, esp. with respect to trade with China, as well as signs of a global slowdown led by the US, China, and Europe, appear to be gaining ground. 

Keeping these evolving conditions in mind, we retain our FY25 current account deficit forecast of 1.2% of GDP.

Rupee Outlook

The start of monetary policy easing in the US with a jumbo-sized rate cut of 50 bps in Sep led market participants to start pricing in the aggressive rate cuts ahead. Although the Fed dot plot in its Sep-24 policy review indicated scope for a 250-bps rate cut by the end of 2026, market participants expected the same to get front-loaded, with rate cuts concluding by the end of 2025. This aggressive pricing weighed on the U.S. dollar, which provided knee-jerk strength to EM currencies, including the INR.

However, the DXY index reversed course in the final week of Sep-24 as the bias for policy support gathered momentum across other key economies (like China, Eurozone, etc.). While the DXY started to stabilise, it received a shot in the arm from a spike in geopolitical uncertainty in the Middle East. Further, evidence of some stickiness in inflationary pressures in the U.S. coupled with relatively upbeat activity indicators has once again forced market participants to prune their aggressive rate-easing expectations.

Overall, the global backdrop in the last 3-4 weeks has turned against EM currencies, with INR touching a fresh all-time low as it breached the psychological level of 84 to the USD earlier this month. The Rupee has seen a drop of 0.9% so far this year (CY24) against the greenback even as RBI maintains the currency stability, weaker than the 0.5% depreciation seen in 2024. While pressure from FPI selling (Oct-24 has so far seen the second highest outflow of USD 8.1 bn from domestic equities) along with some hardening of international commodity prices may have accentuated the depreciation in case of INR, we believe RBI’s hefty FX reserves of USD 701 bn, with record high foreign currency assets (worth USD 613 bn as of Oct 4, 2024) provides ample firepower to prevent run-away weakness.

Overall, we maintain our call of USD/INR moving towards INR 84.5/$ levels by Mar-25.

Says Suman Chowdhury, Executive Director & Chief Economist, Acuité Ratings & Research “With WTO revising the global merchandise trade volume forecast for CY25 downwards, we continue to have a cautious outlook on the export front. Although the trade deficit has subsided in Sep-24 due to benign crude prices and lesser gold imports, the cumulative trade deficit in H1 of the current fiscal is already higher by USD 18 bn vs H1 of the previous year. We continue to maintain a CAD forecast of 1.2% of GDP for FY25. The volatility in the external environment has led to a higher depreciation of the INR in the near term, leading to the breach of the psychological 84.0 level but we expect RBI to facilitate a gradual depreciation over the next six months, given the large forex reserves.”

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: India Merchandise Trade Balance [USD Bn]

Chart 2: India Services Trade [USD Bn]