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Trade deficit widens

* India's merchandise trade deficit widened to a six-month high of USD32.0b in Jul’26 from USD30.4b in June, reflecting stronger import growth despite resilient exports. Merchandise exports rose 19.6% YoY to USD44.2b, while imports increased 17.5% YoY to USD76.2b. During Apr-Jul’27, the cumulative merchandise trade deficit widened to USD118.6b, compared with USD96.7b in the corresponding period last year.

* The composition of imports suggests that the widening trade deficit is being driven more by strong domestic economic activity and elevated global commodity prices. Increase in imports has been driven not only by higher crude oil prices but also by robust growth in non-oil, non-gold imports, particularly machinery, electronics, chemicals, and transport equipment.

Exports continue to remain strong

* India's goods exports remained robust, rising 19.6% YoY (vs. 15.5% in Jun’26, the highest growth in 49 months) to USD44.2b in July, mainly led by oil exports. Oil exports surged 67.6% YoY in Jul’26 on the back of higher refining margins, while non-oil exports also remained strong (13.6% YoY), highlighting continued resilience in manufacturing exports.

* Electronics remained the standout performer, rising 57% YoY to a record USD5.9b in Jul’26, followed by engineering goods (+18%), chemicals (+7%), marine products (+18%), ores & minerals (+17%), and plastics & rubber (+11%). Together, electronics, engineering goods, and chemicals accounted for more than half of India's merchandise exports. Notably, exports to the US rebounded 13% YoY in Jul’26 after two months of weakness.

* Services exports remained resilient, printing 6.4% YoY to USD35.9b in Jul’26, while services imports rose 9.5% YoY to USD18.9b, resulting in a services trade surplus of nearly USD17b during the month. In Apr-Jul FY27, services exports increased 8.8% YoY to USD142.6b, generating a services surplus of USD69.2b. Although services exports continue to provide a critical cushion to India's external account, the moderation in growth, particularly in IT and business services, suggests that AI-driven productivity gains and softer demand from advanced economies are gradually weighing on export momentum

Imports growth led by machinery, electronics, and chemicals

* Goods imports remained broad-based, increasing 17.5% YoY in Jul’26 (vs. 31% in Jun’26), driven by strong growth in petroleum imports (+17.6%) and non-oil, non-gold imports (18.6% YoY).

* Within non-oil imports, electronics (+46%), chemicals (+25%), ores & minerals (+22%), machinery (+13%), base metals (+10%), transport equipment, and capital goods recorded robust growth in Jul’26.

Expect CAD at 1.5% of GDP in FY27

* The outlook for India's external sector has improved materially following the sharp correction in crude oil prices, although geopolitical risks in West Asia remained elevated and could continue to create bouts of volatility in global energy markets.

* We maintain our FY27 current account deficit (CAD) forecast at USD60b (1.5% of GDP), assuming an average Brent crude oil price of USD85/bbl. Although the merchandise trade deficit has widened, strong services exports, resilient remittance inflows, and improving export competitiveness should keep the external balance manageable. Nevertheless, sustained strength in crude oil prices remains the key upside risk to our CAD outlook.

* We maintain our FY27 average USD/INR forecast at 95/USD. Strong reserve adequacy, resilient capital inflows, manageable CAD, and continued RBI support should help contain depreciation pressures despite elevated global uncertainty. Higher crude oil prices remain the key downside risk.

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