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August goods export numbers provided an early indication of the passage of frontloading just as the two tranches of reciprocal tariff increases took effect in the month. Goods exports rose 6.7% yoy in August, while imports were down by 10% yoy, leaving the trade deficit at $26.5bn. Goods exports to the US slowed to 7.0% yoy in August, down from average of 21% in Apr-Jul when exporters rushed to fill orders. Two-way trade with China got a boost with exports up 22% in Aug. Broader diversification efforts, however, are likely to play out more gradually as exports to rest of the world (ex-US) grew by average 0.6% in first five months of FY26 (Apr-Aug). Electronics goods, which are outside the ambit of tariffs, rose by a sharp ~26% yoy in Aug, but moderate vs ~34% month before, while labour intensive sectors were mixed - textiles shrank while gems & jewellery grew. Core imports (ex-oil and gold) trends remain tepid.
US Assistant Trade Representative for South and Central Asia will be in India for a day of talks this week as part of a delegation, though this might not be viewed as official trade negotiations. There have been signs of thawing in relations after conciliatory remarks by the US and Indian administrations in recent weeks, although a concrete step towards resumption in trade negotiations is still to be seen. Service sector trade, meanwhile, continues to be an important counterweight for goods, with exports up 10.6% yoy in Apr-Aug, widening the trade surplus by 17.4% during the period. This adds to our sanguine view on the current account, expecting the deficit to stay within -1.0% of GDP this year. Balance of payments will hinge on the health of the financial flows, with net portfolio inflows in red while investment flows and external borrowings are holding up year-to-date.
The currency continues to buck the regional trend to weaken on the back of an adverse tariff differential vs peers, and portfolio outflows. Separately, JP Morgan is reportedly on course to trim the issuer cap on its GBI-EM (global diversified index) in 1H26, potentially to perk the average return of the benchmark. As a result, weightage of few of the larger bond issuers in the region, including China and India, will be trimmed slightly to ~9% from 10% currently. Thailand, Poland, South Africa and Brazil are expected to be amongst key beneficiaries, according to Bloomberg. Philippines has been put on watch for potential inclusion.
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