India's trade deficit narrows to $21.88 billion in May

India's merchandise trade deficit narrowed to $21.88 billion in May, below expectations of $25 billion, driven by lower imports despite persistent export weakness reflecting uncertain global demand and softer commodity prices. Goods exports reached $38.73 billion, while imports totaled $60.61 billion; however, electronic goods exports saw a 54% year-on-year jump, and exports to the U.S. increased despite tariff hikes. The trade in services showed an estimated surplus of $14.65 billion in May.

Analysis

India's merchandise trade deficit demonstrated a significant improvement in May, narrowing to $21.88 billion, notably below the $25 billion consensus forecast and April's $26.42 billion. This reduction was primarily driven by lower imports, which decreased to $60.61 billion from $64.91 billion in the preceding month. While goods exports experienced a slight increase to $38.73 billion, Gaura Sen Gupta, chief economist at IDFC First Bank, highlighted that persistent weakness in exports reflects ongoing uncertain global demand, influenced by tariffs and softer commodity prices. Despite these broader challenges, specific export categories showed robust year-on-year growth in May: electronic goods surged by 54%, chemicals increased by 16%, and pharmaceuticals grew by 7.38%. Furthermore, India's exports to the United States expanded to $17.25 billion in the April-May period, up from $14.17 billion year-on-year, suggesting a limited immediate impact from U.S. tariff hikes averaging 10% implemented in early April. However, Trade Secretary Sunil Barthwal acknowledged that falling global crude oil prices had a dampening effect on overall export values. Ongoing uncertainty regarding U.S. trade policy, including the status of a 26% tariff for India effective until July 9 as part of a pause on reciprocal duties, has reportedly unnerved exporters and prompted some to front-load shipments. The trade in services contributed positively with an estimated surplus of $14.65 billion in May, bolstering the external balance, and IDFC First Bank projects India's FY26 current account deficit to remain contained at 1.5% of GDP.

Key Decisions for Investors

• Investors should evaluate opportunities within India's export sector, particularly focusing on high-performing categories such as electronic goods, chemicals, and pharmaceuticals, which demonstrated significant year-on-year growth in May.
• It is crucial to closely monitor developments in US-India trade relations and tariff policies, especially concerning the 26% tariff for India with a July 9 deadline, as these could significantly impact export-oriented companies and introduce market volatility.
• The narrowing trade deficit and the positive forecast for a manageable current account deficit support a constructive view on India's macroeconomic stability, though continued vigilance is warranted regarding persistent global demand uncertainties and commodity price fluctuations which could affect future trade performance.