Is the trade deficit ballooning to 3-month high a big worry for India? According to an analysis by Bank of America Securities, he trade deficit may see reversal in trend in the coming months. According to the estimates by the Research house, the 18% tariff cut will help bridge the gap.
Declining US exports add to widening trade deficit
One of the reasons for the widening trade deficit was the declining US exports.Exports to the US fell 22% year-on-year (YoY) in January. Imports from the US rose 23.7% during the month.
However, this trade data was for the month of January when India was facing steep 50% tariff from the United States. Recently on February 2, US president Donald Trump announced reduction in tariff to 18% on Indian exports.
The report noted that with this reduction, India will get a significant relief and a competitive rate across the Asia region with the effective tariffs to come down to 12-13% vs 35%.
“With the removal of penalties and lowering of tariffs, we will see reversal in these trends in the coming months,” Bank of America Securities noted.
India, on the other hand committed to buying $500 bn worth of US goods over five years, or $100 bn every year.
India’s CAD seen at $5.7 bn in January: Bank of America Securities
Despite the wider trade deficit, the Bank of America Securities estimates India’s current account deficit at around $ 5.7 billion for January. “ Overall, India remains on track to run a small current account deficit, with FY26 projected at $30 billion, that is 0.7% of GDP, rising modestly to $37 billion, that is 0.8% of GDP, in FY27.
Services surplus offsets widening trade deficit
The report noted that India’s services sector continued to provide a cushion against the widening trade deficit. The services trade surplus rose to $24.3 billion in January from $22.7 billion in December.
Services exports grew strongly by 26.3% year-on-year and 5% MoM to $43.9 billion, making them about 20% higher than merchandise exports during the month.
Gold, silver imports surge
Another reason for the widening gap was higher gold and silver imports that drove the surge in imports at 20% YoY and 12% month-on-month (MoM).
Gold imports rose 350% year-on-year, while silver shipments increased 127%, supported by higher prices and wedding-season demand.
India’s trade deficit widened to $34.7 billion in January, higher than $25 billion in December and $23 billion a year ago.
Conclusion
Going forward, Bank Of America believes that India’s tariffs relative to its Asian peers has fallen dramatically. Moreover, the RBI’s Real Effective Exchange Rate weaking 12% in last 14 months further aids export competitiveness. As a result, Bank of America expects to see a reversal in trade deficit trends in the coming months.