India’s merchandise trade deficit rose to a 13-month high of USD 32.2 bn in Sep-25 from USD 26.5 bn in Aug-25. While both exports and imports expanded sequentially in the month, the widening of the headline deficit was on account of imports outpacing exports.

Merchandise exports

Merchandise exports clocked USD 36.4 in Sep-25 (+3.6% MoM and +6.7% YoY) vis-à-vis USD 35.1 bn in Aug-25 

• Out of 14 key sub-categories of exports, 10 registered annualized expansion. 
• The strongest annualized performance was seen in Electronic items (50.5%), Marine Products (23.4%), Ores and minerals (18.3%), Agri & allied products (15.2%), Petroleum products (15.2%), etc
• In contrast, there was an annualized drag on account of Miscellaneous products (-18.2%), Plastic and plastic items (-12.0%) and Textiles (-9.8%)
• Core merchandise exports (i.e., exports excluding Petroleum and Gems & Jewellery) rose marginally to USD 28.6 bn in Sep-25 from USD 28.3 bn in Aug-25.

Merchandise Imports

Merchandise imports rose to a record monthly peak of USD 68.5 bn in Sep-25 from USD 61.6 bn in Aug-25 (+11.3% MoM and +16.7% YoY).

• Out of 15 key sub-categories of imports, 12 registered annualized expansion. 
• The strongest annualized performance was seen in Project goods (134.7%), followed by Gems & jewellery (85.2%), Chemicals (33.3%), Leather products (26.3%), Agri & allied products (25.5%), and Textiles (19.5%
• The annualized drag was driven by Petroleum products (-5.8%) and Ores & minerals (-1.2%)
• Core merchandise imports (i.e., imports excluding Petroleum and Gems & Jewellery) rose to USD 41.8 bn from USD 41.0 bn in in Aug-25 
  1. Of which, imports of fertilizers scaled a new monthly peak of USD 2.4 bn.

Merchandise trade balance

The sequential widening in the merchandise trade deficit in Sep-25 was led by Non-core deficit primarily. 

• Non-core trade deficit rose to the highest level in 10 months, at USD 19.0 bn from USD 13.8 bn in Aug-25. 
  1. This was led by a sharp jump in imports of Gems & jewellery from USD 7.3 bn in Aug-25 to USD 12.7 bn in Sep-25
  2. This can be explained by a surge in domestic demand ahead of festive and wedding season, along with record high prices of gold and silver.
• On the other hand, Core trade deficit widened, albeit marginally, to USD 13.2 bn from USD 12.7 bn in Aug-25. 

Services trade

• The commerce ministry’s estimate for services trade surplus for Sep-25 stood at USD 15.5 bn, almost unchanged vis-à-vis USD 15.6 bn in Aug-25 (revised lower from USD 16.5 bn earlier) 
• On a sequential basis, both services exports and imports eased by 1.2%MoM and 1.9%MoM, respectively. 
• On FYTD basis, momentum in services trade surplus remains healthy – it stood at USD 95.5 bn during H1 FY26, up from USD 84.3 bn in the corresponding period in FY25.
• Services trade surplus has continued to provide strength as well as stability to India’s current account over the last few years. The push for digitization post COVID accompanied by the proliferation of Global Capability Centres has helped to diversify exports beyond the traditional IT services. Having said, the imposition of higher fees on new H1 B visas could have a marginal bearing on the IT/ITeS sector exports. Tax on offshoring work to foreign countries under the US HIRE Act (2025), if imposed, remains a bigger risk for India’s service exports. 

Inferences and outlook

Sep-25 trade data was the first print to capture the impact of 50% tariff imposed by US in India. While the annualized growth in headline exports held up, India’s exports to US registered a moderation. To put this in perspective - 

• In value terms, India’s exports to US dropped to a 52-month low of USD 5.5 bn in Sep-25, from USD 6.9 bn in Aug-25
• On annualized basis, India’s exports to the US contracted by 11.9% in Sep-25, the worse performance in last 27 months. 
• The share of the US in India’s merchandise exports slipped to a 64-month low of 15.0% in Sep-25.

Having said, the headline exports were supported by rise in outbound merchandise shipments to other countries. 

• From a geographical lens, goods exports to non-US countries rose by 11% YoY at USD 30.9 bn in Sep-25
• At the country level, exports to Spain (150.8% YoY), China (34.2% YoY), Brazil (25.8% YoY), UAE (24.3% YoY), Bangladesh (23.1% YoY), etc. grew at a healthy pace 

Looking ahead, exports to US could see further downside owing to reporting lags. The bigger concern remains the level of tariff. Negotiations between India-US have once again begun meaningfully, which could lead to 50% tariff getting adjusted lower. This may lead to the 25% penalty tariff perhaps getting withdrawn. In addition, higher US tariffs announced on China (100% additional), if imposed, could prove supportive for Indian exports, on a relative basis. While India could maintain a firm stance on sensitive items under agriculture, etc., there could be a likelihood of granting greater preferential market access to the US for certain products and services - as reflected in India’s recently announced FTA with the UK

For our FY26 CAD forecast, we hold on to our estimate of 0.8% of GDP in case President Trump revokes the penalty tariff of 25% imposed on India. However, if the penalty tariff remains, then FY26 current account deficit could widen to 1.1-1.2% of GDP. 

From capital account perspective, net FDI inflows have increased on a FYTD basis, but FPI is still witnessing a net outflow. The ongoing tariff concerns imply that the FPI flows could continue to remain volatile. While INR has seen some appreciation amidst chances of India-US deal as well speculated RBI intervention, we will keenly watch developments on the India-US trade front. The possibility of President Trump revoking the 25% penalty tariff, could induce a knee-jerk appreciation pressure on the INR. Having said, looking at the current state of dynamics, we maintain our INR forecast of 89.50 for Mar-26.

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