Stuck in the mud: GST not enough as Nifty 50 tad above pre-Independence Day level
The Indian stock market is at a crossroads, with the positive sentiment from GST reforms neutralized by external threats and concerns over corporate earnings.
While the goods and services tax (GST) reforms were hailed as a game-changer for economic consumption and Indian equities, the current market mood does not quite reflect the high hopes and early optimism.
In line with Prime Minister Narendra Modi’s vision, the GST Council proposed a major reform that included a simplified tax structure with three rates of 5%, 18%, and 40%, replacing the earlier four-slab system. These changes took effect on 22 September.
During his Independence Day speech, Prime Minister Narendra Modi had announced the introduction of Next-Generation GST reforms by this Diwali, which will reduce taxes on daily-use items.
Despite the positive news on GST, the Nifty closed at 24,654.70 points on Friday, only slightly above the close on 14 August, when it was 24,631.30 points.
Similarly, the Nifty India Consumption index closed at 12,080.15 points on Friday, slightly higher than 11,839.90 points on 14 August.
According to Dhiraj Relli, CEO of HDFC Securities, GST reforms are unlikely to impact markets immediately. “These measures will take time to filter through, which is why the headline index will only capture their impact once they translate into corporate earnings," he noted.
Corporate earnings have been on the radar for investors.
The September quarter earnings will kick start from 9 October with IT major Tata Consultancy Services' results, which will be an essential factor to track moving forward.
“The current ‘GST’ narrative of sharp improvement in profitability and volumes may also disappoint," believes Kotak Institutional Equities.
In a 22 September report, Kotak Institutional Equities said that although the pace of earnings per share (EPS) downgrades has moderated over the past few months, the September quarter may see some more downgrades, given the prevailing weak demand environment.
After large downgrades over the past 12-15 months, the brokerage expects some stability ahead, with strong earnings growth of 18% for the Nifty 50 in FY27. “Of course, global events can still derail the earnings recovery story."
Pharma tariffs
As events unfolded last week, US President Donald Trump announced a 100% tariff on branded and patented pharmaceutical imports.
Saurabh Mukherjea, co-founder and CIO at Marcellus Investment Managers, explained that from an earnings growth perspective, the impact of the 100% tariffs on branded pharma will be more potent than the 50% overall tariffs imposed on sectors like textiles, gems, leather, auto ancillaries, etc.
“Given that the pharma sector has 10% weight in the Nifty, the tariffs on branded pharma could knock off 50-100bps off Nifty EPS growth (which in any case has been struggling over the past couple of years)."
He believes that the GST and income tax cuts, coupled with the ban on online gambling and interest rates from the Reserve Bank of India (RBI), should start bearing fruit from the December quarter onwards. Thus, a march to restoring earnings growth will begin, he said.
In Union Budget 2025–26, Finance Minister Nirmala Sitharaman offered major relief to taxpayers by raising the tax-free income limit to ₹12 lakh from ₹7 lakh.
Sitharaman had said, “The new structure will substantially reduce the taxes of the middle class and leave more money in their hands, boosting household consumption, savings and investment".
“However, the overall stock market is so overvalued that it will take several quarters of strong earnings growth to restore attractiveness to valuations," said Mukherjea.
According to him, the Nifty 50’s struggles are more indicative of an overvalued stock market than of the potency of the GST cuts.
In the past year, the Nifty 50 has given a negative return of around 6%.
From a valuation perspective, the Nifty 50 is currently trading at a price to earnings of 22.62 times compared to the five-year average multiple of 24.53.
Market experts say tariff uncertainty is still hanging in the air. They believe the US is likely to keep pressure on India until a trade deal is in place.
India said on Friday that its officials held ‘constructive’ talks with their US counterparts during a visit to Washington this week, according to reports. Both sides agreed to continue discussions toward a mutually beneficial trade agreement. The Indian delegation, led by Commerce and Industry Minister Piyush Goyal, visited the US from 22 to 24 September and met with US Trade Representative Jamieson Greer and Ambassador-designate Sergio Gor.
According to some, any resolution on the tariff challenges is likely to push markets higher.
HDFC Securities’ Relli said, “A fresh high for the index is inevitable. It’s only a matter of time, likely after Diwali or early January."
Global headwinds
For now, however, the optimism surrounding GST has been drowned out by the noise over Trump’s tariff moves. Moreover, he added that selling by foreign investors has further dampened the sentiment.
After foreign investors bought Indian equities four straight months ago in March of this year, they have been net sellers for the past three months. In September, they sold Indian shares worth ₹9,500.66 crore. Comparatively, domestic investors have been net buyers throughout 2025. However, domestic buying moderated a little in September to ₹49,892.95 crore after an inflow of ₹94,828.55 crore in August.
While earnings growth expectations can fall a little further, valuations are no longer a concern, government policy is becoming a positive factor for equities, and most foreign funds are lightly positioned, highlighted Herald van der Linde, head of Equity Strategy - Asia Pacific, HSBC Global Investment Research.
In its Asia equity strategy note dated 24 September, Linde said, “We think Indian equities now look attractive on a regional basis and upgrade the market to overweight (from neutral)".
So, the trajectory of foreign and domestic capital flows into Indian equities will remain a key indicator for investors to monitor.
- The Nifty 50 is trading flat, indicating that positive domestic news, like goods and services tax reforms, has been insufficient to spur a rally on its own.
- The 100% US tariff on pharmaceuticals is a major headwind, directly threatening the earnings growth of the Nifty 50.
- There is a clear conflict of opinion among experts regarding market valuation; some see it as ‘overvalued,’ while key metrics (like trailing P/E versus its average) and other analysts suggest it's becoming attractive.
- A key trend is the divergence between foreign investors, who have been selling for three months, and domestic investors, who continue to be net buyers.
- The consensus view is that benefits from domestic reforms will eventually materialize, but a significant market rally is unlikely until global tariff uncertainties are resolved.
topics
