Trade Deficit Reaches Seven-Month High

 May Goods Trade Deficit Expands to US$23.8 Billion, Driven by Increased Oil Trade Deficit; Services Trade Surplus Continues to Moderate

The goods trade deficit for May widened to a seven-month high of US$23.8 billion, primarily due to a substantial increase in the oil trade deficit. The services trade surplus showed continued moderation, consistent with recent trends. Our forecast for the current account deficit (CAD) as a percentage of GDP for FY2025 remains at 1.1%, up from an estimated 0.8% for FY2024, given stronger domestic growth relative to global growth. We maintain our near-term forecast for the USD-INR exchange rate in the range of 83.25-83.75.

Broad-Based Sequential Pickup in Exports

May exports increased 9.1% year-on-year to US$38.1 billion, up from US$34.9 billion in April (Exhibits 1-2). The 9% month-on-month rise was mainly driven by a surge in non-oil exports, while oil exports grew marginally (Exhibits 3-5). Key contributors to the non-oil export growth included gems and jewelry, engineering goods, electronic goods, and textiles, although chemical exports declined.

Oil Imports Drive Widening Trade Deficit

Imports in May rose 7.1% year-on-year to US$61.9 billion, up from US$54.1 billion in April, marking a 14.4% month-on-month increase (Exhibits 1-2). Despite a drop in crude oil prices, oil imports surged 21.1% month-on-month, while non-oil imports grew 11.5% (Exhibits 3-5). Within non-oil imports, investment-led imports jumped 16.5% month-on-month, while consumption-led imports grew 5.2%. The overall trade deficit expansion to US$23.8 billion in May was largely driven by the higher oil trade deficit.

Services Trade Surplus Holds Steady with Softening Bias

The services trade surplus in May stood at US$12.9 billion, down from April’s upwardly revised figure of US$13.7 billion, initially reported at US$12.6 billion (Exhibit 6). Recent trends indicate a moderation in the services trade surplus to an average monthly rate of US$13 billion, compared to the Q4 2023 average of US$15 billion. We anticipate a modest increase in the services trade surplus for FY2025 over FY2024, pending further clarity on the global economic slowdown.

FY2025 CAD/GDP Estimate Maintained at 1.1%

Our estimate for the CAD as a percentage of GDP for FY2025 remains at 1.1%, up from an estimated 0.8% for FY2024, pending details from the Q4 FY2024 CAD/BOP release expected in late June (Exhibit 7). This forecast is driven by relatively stronger domestic demand compared to global demand. We also project a steady capital account surplus in FY2025, resulting in a balance of payments (BOP) surplus of approximately US$34 billion, down from an estimated US$52 billion in FY2024.

While we expect the external sector’s balance to remain stable, potential risks include the re-emergence of geopolitical conflicts affecting commodity prices and supply chains, and delays in the US Federal Reserve’s rate easing cycle affecting capital flows. Despite mixed recent US economic data, particularly softer inflation figures, we anticipate the Fed will maintain a cautious stance at least through the September FOMC meeting, supporting the US dollar. However, the INR could benefit from the initiation of capital flows due to bond index inclusion. We continue to forecast the USD-INR trading within the 83.25-83.75 range in the near term, with significant movements on either side likely tempered by RBI’s foreign exchange interventions.