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Goods trade deficit remains elevated

Goods trade deficit in June remained relatively elevated at US$21 bn, though lower than US$24 bn in May. The softening was mostly led by lower oil trade deficit. Services trade surplus was steady around the US$13 bn mark. We maintain our FY2025 CAD/GDP estimate at 1.1% (0.7% in FY2024), given firmer domestic growth relative to global growth. We retain our call for USDINR in the 83.25-83.75 range over the near term.

Non-oil exports remain steady in June compared with May levels

Exports in June grew 2.6% yoy to US$35.2 bn (May: US$38.1 bn) (Exhibits 1-2). Oil exports registered a sharp drop over June 2023 and May 2024 levels, while non-oil exports were marginally lower than May levels (Exhibits 3-5). Non-oil exports growth in 1QFY25 was driven by engineering goods and electronic goods, while gems and jewelry declined (Exhibit 6-7).

Oil imports led to narrowing of trade deficit from May highs

Imports in June increased 5% yoy to US$56.2 bn (May: US$61.9 bn) (Exhibits 1- 2). Oil imports registered a sharp decline from May levels, while non-oil imports saw a more muted decline (Exhibits 3-5). Non-oil import growth in 1QFY25 was led by electronic goods and machinery, while pulled down by gold (Exhibit 6-7). The trade deficit narrowed to US$21 bn in June and US$64 bn in 1QFY25.

Services trade surplus continues to hold steady; softening bias

Services trade surplus in June was at US$13 bn, in line with surplus of US$13 bn in May (Exhibit 8). The recent trend suggests moderation in service trade surplus to an average monthly run-rate of US$13 bn in 1QFY25 compared with the 4QCY23 average of US$15 bn. We continue to pencil in a modest increase in services surplus in FY2025, until some clarity emerges on the extent of a global slowdown.

Maintain our FY2025 CAD/GDP estimate at 1.1%

We maintain our FY2025 CAD/GDP estimate at 1.1% (US$43 bn), with the assumption of imports outpacing exports, given a relatively stronger domestic demand relative to global demand (Exhibit 9). Furthermore, we continue to expect a steady capital account surplus in FY2025E at US$68 bn (healthy FPI flows), resulting in a balance of payments surplus of around US$25 bn. While we expect the external sector balance to be comfortable, concerns will remain due to (1) volatile commodity prices, (2) the re-emergence of geopolitical tensions and (3) an asynchronous global monetary policy cycle, which is already underway. The Fed remaining on pause should aid USD strength, while some nascent signs of growth weakness would keep FX markets volatile. We continue to expect USD-INR to trade in the range of 83.25-83.75.

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