The lower trade deficit in September (USD 20.8 bn) was due to a reversal in gold imports following the record surge in August. Core exports improved and core imports fell sequentially, whereas petroleum exports were lower and imports were higher despite reduced crude prices. Services surplus saw a mild uptick to USD14.3bn, but growth rates are moderating. Non-IT services growth should remain healthy in FY25E, while IT services growth could slow down. We maintain FY25E CAD/GDP at 1.15% (0.7% in FY24), with downside risk owing to lower crude prices.
Record gold imports drive increased deficit
The merchandise trade deficit dipped to a five-month low of USD20.8bn in September from USD29.7bn in August. This was due to a sharp sequential decline in imports (USD55.4bn, -12% MoM, 1.6% YoY) with exports falling at a slower pace (USD34.6bn, -0.4% MoM, 0.5% YoY). As expected, the drop in imports was led by gold (USD4.4bn), following the record surge in August to USD10.1bn. However, it was still higher than the average of the previous four months in FY25 on account of strong festive demand. This was likely due to the sharp cut in customs duty on gold, along with higher demand ahead of the festive season. Oil imports rose on the month (USD12.5bn, 13.8% MoM, -10.4% YoY), while exports fell (USD4.7bn, -20.5% MoM, -26.7% YoY), causing the oil deficit to rise despite substantially lower crude oil prices.
Core exports fall with YoY growth ticking below imports
The core (non-oil, non-gold) goods deficit also improved in September, as core exports (USD27bn, 1% MoM, 9.1% YoY) increased along with core imports (USD42.8bn, -1.1% MoM, 17.7% YoY). Core export growth has slipped below core imports on a three-month moving average basis but remains robust; improvement in core imports may also signal a recovery in domestic demand. Excluding petroleum, major export categories (Engineering Goods, Electronic Goods, Drugs and Pharma, Organic and Inorganic Chemicals) have healthy YoY growth. Within core imports, Electronic Goods shipments continue to see strong growth on YoY basis.
Services trade surplus moves mildly higher, but growth is slowing
Separately, services trade surplus for September moved higher to USD14.3bn (August: USD13.9bn). The surplus for H1FY25 is higher than last year (~10% YoY) but growth is moderating. Exports (USD30.6bn) rose ~1% MoM, while imports (USD16.3bn) declined marginally. We continue to expect robust services exports growth in FY25, led by higher growth in non-software services; software services growth may slow to low-single digit.
FY25E CAD/GDP to stay at 1.1-1.2%; BoP surplus to be sub-USD30bn
We maintain that FY25E CAD/GDP is likely to track at 1.1-1.2% of GDP. We expect non-oil exports to decline 4%, whereas non-oil imports should grow less than 2% in FY25E after contracting 1.6% in FY24, implying that goods trade deficit/GDP could track near 6.9% (similar to FY24) with downside risks due to lower crude prices. Separately, healthy services exports — including IT services and the solid emerging space of GCC-led business consulting and financial services — have largely helped prop up the current account (non-software net exports tracked >72% growth in FY24). Growth in non-IT services could spill over to FY25 as well, even as IT services exports growth could moderate to low-single digit and remittances may also see a slowdown. Even though capital flows in equities could moderate in FY25 (while JPM index-led debt flows surge), BoP surplus is likely to remain comfortable at USD28-30bn, albeit reducing to less than half of FY24. FDI flows will stay tricky (with slower growth in global FDI as well), but India remains the top global greenfield project destination (despite slower flows in FY24) and may see the flows improve. Overall, we see external fundamentals staying steady and financing needs being manageable.