By Research desk
August 2025 Market Performance Recap:
Indian equities extended their decline in August 2025, marking a second straight month of weakness after nearly four months of steady gains. The Nifty fell 1.4% and the Sensex slipped 1.7%, while midcaps and smallcaps saw sharper corrections, down 2.9% and 4.1% respectively. The mood was weighed down by the unexpected imposition of 50% tariffs by the US on Indian exports—rolled out in two phases during the month—which sparked fears over trade competitiveness and its wider economic spillovers.
Domestic triggers too contributed to the consolidation. The recently concluded earnings season delivered numbers largely in line with expectations—about 74% of Nifty firms met or exceeded profit forecasts, and 86% did the same on revenues. However, the lack of strong forward guidance from corporates capped sentiment, leading to a phase of consolidation despite limited downgrades. Market participants expect upgrades in the second half of the year, supported by a favourable base, potential recovery in consumption, a rebound in BFSI earnings, and opportunities in export-driven sectors.
Flows were another dampener, with foreign investors offloading ₹22,751 crore worth of equities during August, extending their selling streak. Domestic institutional investors, however, provided a strong counterbalance, deploying over ₹83,000 crore in net inflows. On the currency front, the rupee depreciated by 0.7% during the month to touch an all-time low of 88.21 per US dollar, making it the weakest performer among Asian peers year-to-date. Still, the sharp depreciation against the Chinese yuan in recent months has partly offset the impact of higher US tariffs by improving India’s relative price competitiveness.
Overall, August was a month where external shocks and cautious earnings outlook overshadowed positive domestic policy moves like GST cuts and a long-awaited sovereign rating upgrade. With valuations cooling and markets entering oversold territory, the stage is set for potential stability in the months ahead, contingent on easing trade frictions and stronger earnings visibility.
Sectoral performance
In August 2025, sectoral performance showed a mixed picture as markets dealt with US tariffs, muted corporate guidance, and persistent FII outflows. FMCG emerged as the strongest sector, rising close to 1% on the back of GST cut expectations, steady demand for staples, and hopes of a rural recovery. Automobiles also performed well, climbing 5.5% with support from lower taxes and new EV launches, though the gains were largely driven by a few leading companies. IT, on the other hand, slipped slightly as global clients reduced discretionary spending, hiring activity slowed, and concerns grew around potential tariffs on services exports.
Banking and financials remained under pressure, with indices falling around 3% due to heavy foreign selling, weak private bank participation, and interest rate worries. Metals corrected nearly 2% after some early strength, weighed down by profit booking, export concerns under the new tariff regime, and volatility in global commodity prices despite some cushion from a weaker rupee. Real estate was the worst performer, sliding over 4% as higher borrowing costs, trade-related growth worries, and risk-off sentiment pushed investors away from cyclicals. Overall, the month highlighted a clear tilt towards defensives like FMCG and selective buying in autos, while most cyclical and rate-sensitive sectors faced sharp headwinds.
In the following sections, we provide a more comprehensive examination, outlook and detailed insights of some major sectors:
Auto:
The auto sector enters September 2025 after a subdued few months, where demand was affected by cautious consumer sentiment, deferred purchases, and anticipation of GST cuts. Passenger vehicle sales declined by 2–5% year-on-year in April–August, with August alone posting a 7% fall as buyers postponed purchases and dealers reduced stocking ahead of expected tax reductions. Larger SUVs and multipurpose vehicles slowed, while hybrids and premium offerings managed some resilience. Commercial vehicle sales stayed largely flat in the April–August period at around 3.6 lakh units, though August saw a 6% year-on-year rise in dispatches, led by buses and light commercial vehicles supported by infrastructure and logistics activity.
Two-wheelers were mixed: cumulative April–August sales were flat at 77 lakh units as rural demand remained sluggish, though exports grew sharply by 25% to 18.4 lakh units, reflecting strong traction in Africa and Latin America. August brought a temporary lift with domestic two-wheeler sales up 7% year-on-year, led by scooters and premium motorcycles. The three-wheeler segment continued its strong momentum with a 12% growth year-to-date and 15% rise in August, supported by improved urban mobility demand and better finance availability. Tractor sales outperformed, rising 11% in the first five months and 23% in August, aided by favourable monsoons, strong reservoir levels, and improved liquidity conditions in rural markets. Electric vehicles maintained their growth trajectory, with record sales across two- and three-wheelers and rising penetration in passenger vehicles, driven by expanding model launches and policy incentives.
Looking ahead, the sector’s outlook is significantly brighter for the second half of FY26. The implementation of GST 2.0 from late September will reduce effective tax rates on small cars, two-wheelers, three-wheelers, and commercial vehicles from 28% to 18%, while keeping EVs at 5%, making vehicles more affordable and reviving sentiment. With the festive season kicking off alongside this reform, deferred demand is expected to convert into sales momentum. Two-wheelers and three-wheelers are likely to lead growth, passenger vehicles should recover gradually with strong festive bookings, tractors are set to sustain double-digit growth on healthy farm economics, and commercial vehicles should see steady mid-single-digit expansion with infrastructure and logistics spending. Risks remain in the form of high financing costs and urban demand weakness, but the sector as a whole is well-placed to deliver 6–7% growth in FY26, with September marking the likely inflection point.
Hospitality:
The domestic hospitality sector maintained its growth momentum in August 2025, with continued improvements in average daily rates (ADR) across key markets. Analysis of over 170 hotels with ~33,000 keys across eight major cities showed steady YoY and MoM price gains, with lower price-band ADRs up 7.3% YoY and 7% MoM, while the higher price-band grew 5.9% YoY and 5% MoM. Mumbai and Delhi led the way, reflecting stronger corporate travel and events demand. With the festive and wedding season approaching, ADRs are expected to strengthen further, aided by a clear demand–supply imbalance, the revival of foreign tourist arrivals, increased business travel, and higher traction in the MICE (Meetings, Incentives, Conferences, Exhibitions) segment. RevPAR is likely to see sustained growth in the medium term as these structural drivers remain firmly in place.
On the supply side, new inventory additions continued at a healthy pace in August, with leading operators expanding largely through management contracts and franchise arrangements rather than asset-heavy models. Several new properties were signed during the month, while consolidation activity also picked up, with acquisitions adding a significant portfolio of mid-scale hotels to organized players’ networks. This reflects the sector’s preference for asset-light expansion while deepening presence across metros as well as tier-2 and tier-3 cities. Alongside this, the Hotel Association of India launched a mentorship initiative aimed at building a future-ready workforce and addressing the widening talent gap. With an ambitious goal of developing a USD 3 trillion tourism economy by 2047, the programme is designed to strengthen leadership, improve retention, and create sustainable growth pathways for the industry.
Globally, while deal activity in travel and tourism slowed during H1 2025 due to economic uncertainty, rising borrowing costs, and policy shifts in major economies like the US and China, the Asia-Pacific region, particularly India, stood out with double-digit growth in transactions. This divergence underscores India’s positioning as a key growth market for hospitality investments. Supporting this momentum is the robust outlook for domestic tourism, with visitor numbers expected to double from 2.5 billion in 2024 to 5.2 billion by 2030, translating into a CAGR of over 13%. Enhanced infrastructure, improved air connectivity, and expanding domestic air travel—from 307 million passengers in FY24 to an expected 693 million by FY30—are further bolstering demand.
Despite India’s hotel room base standing at 3.4 million as of March 2024, the branded and organized segment still accounts for only about 11%, highlighting the substantial scope for penetration. The gap is most acute in the luxury segment, where supply remains constrained at just 29,000 keys across 230 properties, despite rising demand driven by higher disposable incomes and evolving consumer preferences. Occupancy in this segment is already strong at 60–70%, with revenue per available room far exceeding upscale and mid-scale hotels, underlining the premium pricing power of luxury properties. Going forward, the sector is poised for strong and sustained growth, supported by resilient domestic demand, supply shortfalls in premium categories, and favourable policy support.
Metals:
The Indian metal sector begins September 2025 in a mixed state—facing weak capacity utilisation, rising import pressures, and global demand uncertainties, but also supported by resilient domestic consumption and government policy interventions. Overall capacity utilisation has slipped to 78%, the lowest in four years, compared with 85% in FY24. Within this backdrop, the performance of sub-segments is diverging: iron ore prices rose 20% YoY in August, while copper and zinc have been under pressure due to global headwinds.
Steel remains the most affected by imports. Despite producing 152 million tonnes in FY25 (3.9% YoY growth), domestic producers face rising competition from low-cost imports, mainly from FTA countries and China, now accounting for 7–7.5% of market share—the highest in six years. This has forced smaller mills to scale back production and delay $45–50 billion worth of expansion projects. The government has proposed a 12% safeguard duty on imports for three years, which could provide relief. In the near term, steel demand is expected to recover from October onwards, with 55–60% of annual consumption typically concentrated in H2. GST 2.0, effective September 22, is set to reduce component costs, indirectly benefiting steel demand.
In aluminium, production rose modestly by 0.9% in FY25 to 42 million tonnes, supported by steady infrastructure demand and applications in EVs and construction (13% of consumption). The sector is cushioned by the National Infrastructure Pipeline and government’s Aluminium Vision 2047, though near-term growth will depend on infrastructure execution. Copper production grew strongly by 12.6% in FY25 to 5.73 lakh tonnes, led by refinery expansions, but prices fell 28% YoY due to global demand weakness and trade tensions, highlighting near-term risks. Iron ore remains the bright spot, with 4.4% production growth to 263 million tonnes and strong domestic steel demand supporting NMDC-led price hikes to ₹5,750 per tonne for lumps and ₹5,010 for fines.
Among base metals, zinc is supported by supply tightness, trading around ₹270/kg with LME inventories down to 120,000 tonnes, while lead prices remain stable near ₹181/kg. Nickel remains under pressure due to Indonesian oversupply despite recent quota cuts. On the policy front, GST 2.0 rollout, import safeguard duties, and the National Critical Mineral Mission will provide structural support, but near-term risks from cheap imports and global slowdown remain elevated.
Domestic demand recovery, festive-led consumption, and government infrastructure spending should drive incremental growth in H2 FY26. Steel demand is expected to rebound in double digits, aluminium demand to stay resilient, and iron ore prices to remain firm. However, copper and nickel are likely to remain weak due to global softness. The sector’s near-term trajectory will depend heavily on import protection measures and the pace of domestic consumption recovery.
Banking/Finance:
The Indian Banking & Finance sector enters September 2025 with strong fundamentals and steady growth prospects. The RBI has maintained the repo rate at 5.50%, with cumulative rate cuts of 100 bps earlier in FY26, and systemic liquidity remains ample with a CRR of 3.0%. Policy transmission has been swift, with bank MCLRs falling by 80 bps since February, supporting both retail and corporate credit demand. Credit growth accelerated to 10.22% YoY in August 2025, led by retail and housing loans, while deposit growth remained healthy at 10.05%, and the credit-to-deposit ratio held at 79.2%, reflecting a stable funding base.
Asset quality is robust, with the gross NPA ratio at 2.3%, the lowest since 1998, and a provision coverage ratio of 76.5%, supporting resilience against potential stress. Profitability metrics are strong, with ROA at 1.32% and ROE at 13.8%, while major public sector banks have returned to profitability, highlighted by Indian Bank’s Q1 FY26 net profit rising 24% to ₹2,973 crore. Private banks continue to lead in CASA ratios, fee income, and cost efficiencies, while NBFCs are growing at a moderated pace (13–15% in FY25–26) with retail assets now forming 58% of their books. Housing finance and microfinance segments remain robust, though pockets of over-leveraging in microfinance warrant caution.
The sector is further supported by mutual fund and insurance growth, with industry AUM reaching ₹75.36 trillion and Q1 FY26 equity inflows of ₹1.33 trillion, while life insurance gross premiums grew 4.8%, non-life 5.2%, and health insurance 9.8%, boosted by regulatory reforms and increasing penetration. Digital finance is scaling rapidly, with India’s fintech market projected to reach $83.5 billion by end-2025, supported by UPI expansion, CBDC pilots, and AI-driven credit innovations.
Near-term catalysts include festive season demand in auto, consumer durables, and housing, as well as corporate credit growth driven by infrastructure capex. Credit growth is expected to accelerate to 11–12% by FY26-end, deposits to 10–11%, and GNPA is likely to remain below 2.5%. Key risks remain elevated global crude prices, macro volatility, and stress in unsecured retail segments.
Overall, the sector outlook is constructive, favoring private banks with strong digital franchises, secured NBFCs, and mutual fund houses with rising AUM share, while caution is warranted for unsecured lenders, certain PSU banks, and high-volatility fintech start-ups. A balanced strategy with diversified exposure to banks, NBFCs, and asset managers, combined with tactical allocations to insurance and high-quality credit, is recommended to capture stable growth while mitigating near-term risks.
Important events & updates
A few important events of the last month and upcoming ones are as below:
- India’s GDP rose 7.8% YoY in April–June 2025, up from 7.4% in the previous quarter and the fastest in five quarters, beating the 6.6% estimate. Growth was driven by stronger consumer spending as easing inflation improved household purchasing power.
- The 56th GST Council meeting on 3rd Sept 2025 introduced GST 2.0, reducing slabs from four to three. Effective 22nd Sept, most goods shift to 5% or 18%, sin goods to 40%, and some to zero-tax—simplifying compliance, boosting consumption, and supporting long-term growth.
- The HSBC India Manufacturing PMI rose to 59.3 in August 2025 from 59.1 in July, below the flash estimate of 59.8. It signalled the strongest improvement in operating conditions in over 17 years, driven by robust demand and production growth at a near five-year high.
- The HSBC India Composite PMI rose to 63.2 in August 2025 from 61.1 in July, a 17-year high and a new record for the index. Though below the flash estimate of 65.2, the surge reflected broad-based output growth across manufacturing and services.
- The HSBC India Services PMI stood at 62.5 in August 2025, revised down from the flash 65.6 and below expectations of 65, but up from 60.5 in July. It marked the strongest services expansion since June 2010, with new orders and output rising at their fastest pace in over 15 years.
Fundamental outlook:
India’s growth base remains firm even as external risks rise. Real GDP grew 7.8% YoY in Q1FY26 (five-quarter high), with GVA at 7.6% led by services 9.3%, manufacturing 7.7%, and agriculture 3.7%. The expansion was investment-led: GFCF up 7.8%, while government consumption rebounded 7.4% after last year’s dip. Private consumption rose 7.0% (softer than 8.3% a year ago). On a nominal basis, GDP grew 8.8% (vs the Finance Ministry’s 10.1% FY26 assumption), a gap that could complicate fiscal math if it persists. Macro ratios stayed healthy: investment rate ~32.3% of GDP, implied savings ~30.4%, and net imports 1.9% of GDP in Q1FY26.
Policy support is front-loaded. On money/liq, the RBI has delivered 100 bps of repo cuts in 2025 and a CRR reduction from 4% to 3%, injecting liquidity (≈₹50,000 crore). System liquidity and the large RBI dividend strengthen transmission. On fiscal, Apr–Jul FY26 spending rose 20.2% YoY with capex up 32.8% to ₹3.5T (31% of FY26BE already), even as July itself saw a capex pause (–10.5% YoY; ex-loans –30.8%). Revenues were mixed: Jul’25 net tax –26.6% YoY (direct tax –18.5%, GST –9.2%, customs –11.4%) while non-tax +40.4%; Apr–Jul total receipts +7% YoY, with direct tax –4.3% and indirect +6.7%. The Apr–Jul fiscal deficit hit ₹4.7T (30% of FY26BE) vs 17% a year ago—consistent with capex front-loading.
GST reform is a second-half catalyst. GST 2.0 (effective 22 Sep 2025) compresses slabs from four to three: most goods shift into 5%/18%, the 12%/28% buckets are removed (with select “sin” items at 40%), and some categories move to Nil—a package aimed at raising disposable income, simplifying compliance, and supporting consumption through the festive stretch. Counterbalancing this, the U.S. tariff package (up to 50%)—including the additional 25% from Aug 27—poses export and employment risks in trade-sensitive pockets and may temper private capex in those value chains.
Banking and currency conditions are manageable but warrant tracking. Non-food bank credit growth cooled in Jul’25 to ~0.1% MoM (9.9% YoY); deposits ~10.2% YoY. Funding costs eased at the margin (term-deposit WALR on outstanding –8 bps MoM to 6.92%), but lending rates on fresh rupee loans +18 bps MoM to 8.80% in July, implying an uneven pass-through. The rupee fell 0.7% in Aug to a record 88.21/USD (–3.0% YTD), partly offset by a ~6% appreciation vs CNY over four months, which cushions tariff impact on relative pricing. Market flows remain a swing factor: FIIs –₹22,751 crore in Aug vs DIIs +₹83,341 crore, with domestic savings still anchoring risk appetite. Base case: with policy support and capex momentum, FY26 real GDP ~6.4% (near RBI guidance), skewed to H2 as GST 2.0 and festive demand feed through; risks stem from tariff escalation, a prolonged nominal-growth shortfall, or a sharper INR slide.
Technical outlook.
Price action signals consolidation with a positive long-term bias. August saw a second monthly decline: Nifty –1.4%, Sensex –1.7%, with broader indices weaker (Midcap –2.9%, Smallcap –4.1%). Into September, primary trend health is intact: Nifty trades above its 100- and 200-day EMAs; the short-term tape is neutral. Nifty resistance: 25,000; supports: 24,500 then lower. Sensex resistance: 82,000; supports: 80,500 and 79,300. RSI/MACD prints are neutral—consistent with range-bound behavior until a data/policy impulse shifts positioning. Volatility is contained (India VIX low), implying orderly price discovery rather than disorderly repricing.
High-frequency activity is strong. HSBC PMIs: Manufacturing 59.3 (Aug)—a 17.5-year high with output at a near 5-year high; Services 62.5 (Aug)—strongest since Jun 2010; Composite 63.2—a record. The fiscal pulse is visible: Apr–Jul capex already 31% of FY26BE; total spending +20.2% YoY. While Jul GST receipts –9.2% YoY and net tax momentum dipped, the upcoming GST 2.0 (22 Sep) is expected to lift transaction volumes into Q3. Bank transmission is in motion but uneven: deposit WALR (outstanding) 6.92% (–8 bps MoM); fresh-loan WALR 8.80% (+18 bps MoM); outstanding loan WALR 9.38% (–6 bps MoM)—suggesting scope for further easing of effective borrowing costs in H2 as liquidity stays ample.
Flows and FX frame near-term ranges. FII outflows in Aug versus steady DII inflows kept headline indices orderly despite global trade noise. The INR at88.21/USD (record low) tightens financial conditions at the margin, but subdued volatility and strong domestic PMIs limit spillovers. Net-net, the quantitative setup argues for sideways-to-up bias: range-bound index action near the cited levels in the very near term, with breakout odds improving into Q3 as GST 2.0 implementation, festive demand, and capex disbursements show up in high-frequency prints (PMIs, e-way bills/GST, credit, and power demand). Downside monitoring points are persistence of FII selling, a further INR leg lower, or weaker nominal tax collections that force fiscal recalibration.
Outlook for the Global Market
US Market:
The US equity markets entered September with strong momentum and record-breaking highs, supported by expectations of imminent Federal Reserve rate cuts and resilient corporate earnings. Year-to-date, the S&P 500 has climbed 18.4%, while the Nasdaq has led with a 22.1% gain, powered by artificial intelligence adoption and technology sector leadership. August saw broad-based gains across indices: the S&P 500 rose 2.15% to reach a record 6,532, the Nasdaq advanced 3.5%, the Dow Jones gained 1.2% despite manufacturing headwinds, and the Russell 2000 surged 4.6% as small caps participated in the rally.
From a valuation perspective, equities are trading close to fair value, though dispersion across styles and sectors remains notable. Value stocks advanced 5.05% in August, outpacing growth (+0.4%) and core equities (+3.0%). By size, small caps outperformed larger peers, hinting at a broadening rally beyond mega-cap technology.
The September 17th FOMC meeting is widely seen as pivotal, with markets pricing in an 89% chance of a 25 bps rate cut and some speculation of a larger 50 bps move. The Fed Funds Rate has been held at 4.25–4.50% since December 2024, but softer labour market conditions are building pressure for policy easing. August payrolls added just 22,000 jobs against expectations of 75,000, while unemployment climbed to 4.3%, the highest since 2021. Job creation in 2025 has slowed sharply compared with last year.
Bond markets have already adjusted, with the 10-year Treasury yield falling to 4.05% from 4.38% in July and the 2-year yield at 3.49%. The curve has steepened, suggesting markets anticipate sustained cuts through 2026, potentially lowering the 10-year yield below 4% next year and further into 2027.
Headline GDP growth rebounded to 3.3% in Q2 2025 after a contraction in Q1, though this was partly inflated by trade-related distortions from tariff front-running. Adjusted for these effects, underlying momentum has slowed. Leading indicators also point to moderation, with the Conference Board’s index declining and its six-month trend in negative territory.
Inflation remains sticky: July CPI was 2.7% year-on-year, with core CPI at 3.1%—a five-month high. Forward projections suggest modest acceleration in the upcoming September print. Rising healthcare costs, tariffs, and wage pressures tied to slower hiring remain risks.
Despite macro uncertainty, earnings remain a key market support. In Q2 2025, 81% of companies beat both earnings and revenue expectations, with average profit growth of 9.5%. Guidance for Q3 points to another quarter of strength, with EPS projected to grow 7.5%. Technology, financials, and communication services are leading sectors, delivering EPS growth of 21.6%, 20.3%, and 18.8%, respectively. Valuations are stretched at a forward P/E of 22.1x versus historical averages, but earnings resilience continues to justify premium multiples.
Sectoral Highlights
- Technology: YTD gains of 28.5% driven by AI adoption across hardware and software. While valuations are elevated, select names remain attractive.
- Healthcare: Up just 1.4% YTD, making it one of the most undervalued sectors. Medical devices and biotechnology offer compelling opportunities, supported by M&A activity worth $300 billion in August.
- Financials: +18.2% YTD, balancing near-term pressure on margins from lower rates with longer-term credit and loan growth potential.
- Energy: The laggard with -8.2% YTD performance, but offers contrarian value given strong free cash flows and geopolitical tailwinds.
- Real Estate: Rose 3.1% in August, supported by expectations of lower borrowing costs and attractive dividend yields.
- Utilities: Declined 1.4% in August, reflecting stretched valuations despite falling yields.
Volatility remains subdued, with the VIX at 15.2, marking the longest stretch without a 3% pullback in nearly two years. However, risks remain elevated: labour market weakness, tariff uncertainties with key trading partners, and geopolitical tensions with China could trigger volatility spikes. Elevated valuations and heavy concentration in technology also leave markets vulnerable to sector-specific corrections.
The near-term outlook hinges on the September Fed meeting, which is expected to set the tone for the rest of 2025. A dovish pivot could extend the equity rally, with small caps, healthcare, and select technology names well positioned to benefit. However, stretched valuations, slowing fundamentals, and trade-related uncertainties argue for a balanced approach.
In summary, US equities remain supported by strong earnings, resilient consumer demand, and the prospect of monetary easing. Yet, labour market deterioration, sticky inflation, and geopolitical risks suggest a more selective strategy is warranted. The September Fed decision will be a defining moment for market direction into year-end, requiring investors to stay diversified and tactically positioned.
Outlook for Gold
Gold prices have rallied to fresh record highs, with COMEX touching $3,653/oz (+45% YTD) and India’s MCX crossing ₹1,09,000 per 10g (+22.6% YTD). The uptrend is being supported by expectations of Federal Reserve easing, with markets almost fully pricing a 25 bps cut at the upcoming September 17th meeting and speculating on the possibility of a deeper 50 bps move. A weaker dollar (DXY at 97.3, down 3.6% YTD), falling treasury yields, and strong safe-haven demand amid global uncertainties have further reinforced bullion’s momentum. On the domestic front, festive demand has added to the surge, with consumers advancing purchases ahead of Navratri and Diwali, even as high prices begin to test affordability.
Central bank buying remains a powerful structural driver, with more than 410 tonnes added YTD, led by Poland, China, and Turkey. For the first time since 1996, central bank gold holdings (valued at $4.5 trillion) have overtaken US Treasuries, underlining gold’s renewed role as a monetary anchor. Investment flows also remain robust, with ETFs witnessing $43.6 billion of inflows YTD, the highest since 2020, and gold miners delivering outsized returns of nearly 80% on the back of strong margins. Technically, COMEX support is seen near $3,300 with resistance around $3,580, while MCX is expected to trade in the ₹98,500–₹1,04,000 range. Overall, gold remains on a structural bull run supported by dovish monetary policy, central bank accumulation, and seasonal demand, with Q4 2025 targets in the $3,600–$3,900/oz range.
What should Investors do?
India’s domestic growth trajectory remains robust despite external headwinds, supported by a combination of proactive fiscal and monetary measures. Real GDP growth accelerated to 7.8% YoY in Q1FY26, driven by strong contributions from services (9.3%), manufacturing (7.7%), and agriculture (3.7%), alongside investment-led momentum with gross fixed capital formation up 7.8% and government spending rising 7.4%. While private consumption moderated to 7.0%, the front-loading of supportive measures—including 100 bps repo rate cuts, 50 bps CRR reduction, improved bank liquidity, RBI dividend, higher government capex, and consumption boosts in the budget—is expected to strengthen economic activity in H2FY26.
The recently announced GST 2.0 reforms, effective from 22 September 2025, are likely to further bolster consumption-led growth. Rationalisation of slabs from four to three (5%, 18%, and select 40%), along with Nil GST on certain categories, is expected to improve disposable incomes, simplify compliance, and support broad-based spending, particularly among rural and lower-to-middle income households. Sectors likely to benefit include Consumer Discretionary, FMCG, Retail, Automobiles, Insurance, Building Materials, Cement, and Real Estate.
Nonetheless, external risks persist, especially the U.S. tariffs on Indian exports, which could temporarily weigh on export-dependent sectors and private capital expenditure. Despite this, liquidity remains strong, with DIIs injecting $55 billion YTD, mitigating FII outflows of $12.8 billion and reducing dependence on foreign flows. Market valuations have also corrected, with the FTSE India PE premium over EM at 56%, down from 97% a year ago, creating a relatively attractive entry point.
In the near term, the market is expected to remain range-bound, with mid- and smallcap segments gradually improving as earnings recovery gains traction and domestic liquidity remains ample. Sectoral focus should remain on BFSI, Telecom, Consumption, Hospitals, and interest-rate sensitive proxies, with selective opportunities in Retail consumption, FMCG, and capex-oriented plays benefiting from price corrections and domestic growth visibility. Conversely, export-oriented sectors warrant a cautious approach due to ongoing tariff uncertainties.
Overall, the recommendation is to maintain a constructive yet cautious stance, concentrating on quality, domestically-driven growth stocks, market leaders, and monopolistic businesses with strong earnings visibility and reasonable valuations. While near-term consolidation is likely, the combination of GST reforms, front-loaded fiscal and monetary measures, and recovering corporate earnings should provide the catalyst for a broader market uptrend in H2FY26.
Disclaimer:
This article should not be construed as investment advice, please consult your Investment Adviser before making any sound investment decision.
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