Last week’s market sell-off, which saw the Nifty50 drop from 25,000 to 24,400, was triggered by the U.S.’s imposition of 50% tariffs on Indian goods. However, this week the domestic market staged a partial recovery, fueled by optimism surrounding the rationalisation of GST rates.
The Nifty50 nearly reclaimed the 25,000 marks but ultimately closed the week at 24,741 on Friday, indicating continued volatility and a narrowed trading range.
Caution persists due to the anticipated impact of the U.S. tariffs on the Indian economy, expected to be felt from Q3 onwards. As the U.S. is India’s largest export destination, accounting for 2.2% of GDP, the impact of these tariffs is unavoidable. While companies explore strategies like cross-country billing and manufacturing diversification to retain export clients, a slowdown in exports and new growth opportunities is likely.
The positive impact of the GST rate cuts on domestic consumption is expected to partially mitigate the negative effects of reduced export competitiveness. The impact on sectors like Textiles, Equipment Manufacturers, Metals, Auto Ancillaries, Seafood, Basmati, Jewellery, IT and Pharma is likely to be mitigated by boost in domestic consumption as Durables, Discretionary, Staples, Hotels, FMCG, Electronic and Autos.
India’s economic resilience, underscored by a strong Q1 GDP, also supported the market recovery. However, the sustainability of this growth needs to be reassessed for Q3. The substantial GST tax reduction, estimated at around ₹50,000 crore annually, could propel the Nifty above 25,000, particularly as consumption-oriented stocks, which stand to benefit most, make up approximately 18% of the Nifty50 (excluding diversified players like ITC and RIL).
An improved earnings outlook for these sectors is anticipated from the December quarter onwards, impacting FY26 and FY27. Additionally, the financial sector (30% of Nifty50), is expected to benefit from increased consumption and a potentially more accommodative RBI policy, especially with CPI forecasts suggesting further cuts. The consumption space, undervalued in the past two years, is poised for a revaluation.
However, a decisive breakout above the 25,000 level hinges on a resolution to the U.S.-India trade dispute. Negative narratives from U.S. officials intensified following the 50% tariff implementation on August 27th but have diminished somewhat since the Shanghai Cooperation Organisation (SCO) Summit in China.
The Modi-Xi-Putin meeting could present a challenge to Trump, which has fueled hopes of a potential resolution. Supportive statements from Western nations and indications from U.S. officials about resolving trade issues have raised optimism. The market anticipates that the 50% tariff is unlikely to be a long-term measure. Yet, it’s premature to conclude that U.S. trade strategy will moderate quickly, particularly given that the U.S. views the SCO summit with suspicion.
In the near term, a mixed market bias is expected as uncertainty persists around the U.S.-India trade relationship and global headwinds. Consumer-based sectors are likely to outperform, despite profit-taking seen towards the week’s end.
Meanwhile, gold prices have risen to new highs, reflecting investor caution amid concerns about prolonged U.S. tariffs, their impact on global growth, and geopolitical shifts. A global bond market sell-off has pushed yields on long-term bonds higher, with the UK’s 30-year gilt yield reaching to the 21st century’s high of 5.75% this week.
Long-term borrowing cost & yield are rising in America and Japan, fueled by concerns over ballooning debts, spending plans, and a global economic slowdown, add to investor apprehension.
The author, Vinod Nair, is Head of Research at Geojit Financial Services.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making investment decisions.
