Trade Gap Narrows Sequentially, but Oil Risks Loom Large: QuantEco

India’s merchandise trade deficit narrowed to $27.1 billion in February from $34.7 billion in January, driven by a sharp sequential decline in imports, even as exports remained broadly flat, according to a report by QuantEco Research.

Imports fell 10.6% month-on-month to $63.7 billion, led by a drop in precious metals, while exports held steady at $36.6 billion. The easing in the headline deficit masked a more stable underlying trend, with the core trade deficit, excluding petroleum and precious metals, moderating to an eight-month low of $9.8 billion, the report noted.

The composition of trade continues to reflect uneven global demand. Among exports, gains were led by plantation products, marine goods, machinery and electronics, while petroleum products, textiles and leather saw contraction. On the import side, demand remained strong across electronics, machinery, and gems and jewellery, underscoring resilient domestic consumption and investment cycles, it said.

Despite the February improvement, the broader trend remains one of pressure. Imports are up 8.5% year-on-year in April-February, outpacing export growth of 1.8%, pushing the cumulative trade deficit to $310.6 billion for the period.

The report, authored by Yuvika Singhal, Vivek Kumar and Shubhada Rao, cautioned that the external outlook is turning increasingly uncertain amid shifting US tariff policies and rising geopolitical risks.

A fresh escalation in the Middle East poses a key risk, particularly through energy prices. Iran’s control over the Strait of Hormuz, which handles a significant share of global oil shipments, has already pushed crude prices to their highest levels since the Russia-Ukraine conflict, the report said.

If crude oil averages around $100 per barrel in 2026-27, compared with about $70 in 2025-26, India’s current account deficit could widen to 2.2% of GDP, nearly double the estimated 1.1% in 2025-26, the report said.

While India’s direct trade exposure to Iran and Israel remains limited, the indirect impact through higher energy import costs and potential spillovers to remittances and exports could weigh on the external balance, the report added.