Terms of Trade
Terms of Trade (ToT) measures the ratio of a country's export prices to its import prices, indicating whether the prices of what a country sells abroad are rising faster or slower than the prices of what it buys from abroad.
When a country's Terms of Trade improve (i.e., the ratio rises), it means exports are becoming relatively more valuable compared to imports—the country can afford more imports for the same quantity of exports. A deterioration means the reverse: the country must export more to pay for the same quantum of imports. For India, the Terms of Trade are deeply influenced by oil prices, because petroleum products constitute the single largest import category, typically accounting for 25–30% of total import value.
India is structurally an oil importer. When global crude oil prices rise sharply—as they did in 2021–2022 when Brent crude moved from $50 to over $120 per barrel—India's import bill inflates dramatically while export receipts do not necessarily rise in proportion. This deteriorates the Terms of Trade, widens the Current Account Deficit (CAD), puts depreciation pressure on the rupee, and transmits inflationary impulses through fuel and transportation costs.
Conversely, when oil prices collapse—as in 2014–2016 and briefly in 2020—India's ToT improve substantially. The current account narrows, fiscal subsidies on petroleum products decline, inflation eases, and the economy receives a broad windfall. Policymakers have at times used these periods to raise taxes on petrol and diesel rather than pass the full benefit to consumers, recouping revenue while partially maintaining the ToT dividend.
Beyond oil, India's ToT are also affected by commodity cycles in metals (for industries like steel and aluminium, which are both imported and exported), agricultural produce (India is both an importer and exporter of different agricultural commodities), and electronics (almost entirely imported). Software and IT services exports do not affect the merchandise ToT but significantly affect the current account through the invisibles account.
For macroeconomic investors, monitoring the ToT provides a structural lens on India's external sector health. Prolonged ToT deterioration—driven by sustained high oil prices—creates fiscal and current account stress that historically has been associated with rupee weakness, higher inflation, and RBI tightening cycles, all of which affect equity valuations and sectoral performance.