“We don’t have to be smarter than the rest. We have to be more disciplined than the rest.”
Indian equity indices saw a further modest correction in August 2025 with BSE Sensex and NSE Nifty down 1.5%/1.2%, respectively. Broader market also continued to correct with NSE Midcap index down 2.8% and BSE Small Cap index losing 3.6% for the month.
Auto was the best performing sector as the biggest beneficiary of the GST rate cuts announced by the government. FMCG was flat for the month while all other sectors delivered negative returns for the month. IT was in-line with the Nifty while Banks, Healthcare and Capital Goods all underperformed the Nifty. Oil & Gas, Power and Real Estate were the worst performing sectors.
Global markets continued to do well. MSCI World index rose 2.5% in August led by US (S&P 500) rising 1.9%. MSCI Europe rose 3.2% and MSCI Japan rose 6.9%. MSCI EM also rose 1.2% supported by a 4.9% rise in MSCI China. Crude oil declined 6.1% in August.
FII’s remained heavy sellers in August as additional US tariffs announced on India continued to weigh on the sentiment. FIIs sold US$4.3 bn in Indian equities, although this was more than offset by DII’s investing US$10.8 bn. Domestic MFs invested US$8.1 bn while insurance inflow was US$2.8 bn.
India’s real GDP growth for Q1FY26 surprised everyone positively at 7.8% (YoY) vs 7.4% (YoY) growth in Q4FY25. This was supported by stronger growth in services while manufacturing growth also remained robust. On the Independence Day, the Prime Minister announced plans to significantly rationalize GST rates and reduce the number of slabs from 4 to 2.
RBI left key interest rates unchanged during its policy meeting in August and maintained a neutral policy stance, signalling caution amid global trade headwinds. S&P Global upgraded India’s sovereign rating from BBB- to BBB while maintaining a stable outlook.
CPI slowed to a more than 8 year low of 1.6% in July from an already very low 2.1% (YoY) in June due to continued softness in food prices. Core-core inflation (i.e. core inflation ex petrol and diesel) also moderated to 4.1% (YoY) in July from 4.6% (YoY).
Industrial production growth (IIP) improved to 3.5% (YoY) in July from a weak 1.5% (YoY)in June. Gross GST revenue collection was Rs 1.86 tn in August 2025, up only 6.5% (YoY). Other key developments during the month – On August 4, 2025, US government announced plans to impose an additional 25% import tariff on Indian goods from August 27, 2025 citing purchase of Russian crude oil, taking the overall tariff on Indian goods to 50% outside of exempted or specific categories.
Nifty consensus EPS estimate for CY25/26 saw a +1%/-1% change respectively during August as per Bloomberg. Nifty now trades on 19.8x 1-year forward PE. This is now in-line with its 5-year average and a ~10% premium to its 10-year average. Valuations in midcap and small cap space have also seen correction in the last 2 months.
GST Rate Simplification – A Landmark Reform.
India’s long-awaited GST 2.0 reform has arrived with clarity and conviction, marking a pivotal shift in the country’s indirect tax landscape. Far from being just a rate-cut exercise, GST 2.0 signals a deeper structural transformation aimed at enhancing transparency, formalisation, and consumption-led growth. The absence of negative surprises in the announcement reaffirms that policymakers are maintaining a clear focus on reviving demand and easing household financial burdens.
The sheer scale of the reform has decisively ended uncertainty around the government’s stance, with the breadth and depth of rate cuts not only meeting but, in many cases, exceeding expectations. Notably, reductions on essential goods came as a clear positive surprise, with the total consumer benefit estimated at around $20 billion—poised to inject fresh momentum into the economy. The introduction of a simplified two-slab structure—5% for essentials and 18% for most other goods and services—replaces the earlier four-tier system, while a distinct 40% rate has been earmarked for luxury and sin goods. This streamlining is expected to make the tax regime more equitable and predictable.
Market observers and policy experts view this transition as a stepping stone toward a single standard GST rate—a model adopted by several mature economies. A unified rate would eliminate classification disputes, reduce compliance burdens, and enhance transparency. With over 70% of GST collections already coming from the 18% slab, a single rate is seen as fiscally viable without significantly impacting revenue. Additionally, simplification is expected to boost formalisation, especially among MSMEs, by lowering entry barriers and reducing the incentive to operate in the informal sector. Revenue buoyancy—the responsiveness of tax revenue to economic growth—has already improved post-GST, rising from 0.72 to 1.22 for states, and a unified rate could further enhance this by broadening the tax base and reducing leakages. With monthly GST collections averaging ₹1.8 lakh crore and a tax base exceeding 1.5 crore entities, India is well-positioned to eventually converge toward a unified rate, fulfilling the long-standing vision of “One Nation, One Tax”.
Key insights from the reforms:
- Simplified GST structure: Council introduces a “Simple Tax” with two main rates — 18% (standard) and 5% (merit), plus 40% for demerit goods, easing compliance and benefiting citizens and businesses.
- Insurance relief: GST fully exempted on life and health insurance policies (including reinsurance), making coverage more affordable for individuals, families, and senior citizens.
- Healthcare & essentials: GST on lifesaving drugs, medicines, medical devices, and supplies slashed to 0–5%, lowering treatment costs and expanding access to critical healthcare.
- Everyday goods cheaper: Major rate cuts on common household items, consumer appliances, packaged foods, toiletries, bicycles, and personal care products — easing inflation pressure on consumers.
- Boost to sectors: Agriculture, MSMEs, textiles, fertilizers, renewables, transport, and labour-intensive industries see rate reductions and inverted duty correction1, spurring growth, jobs, and investment. Mass mobility vehicles like smaller cars and motorcycles up to 350cc see reduced GST rates, dropping from 28% to 18%. Higher end autos have not seen cess imposition, which is a huge positive.
- GDP & Inflation impact: GST related demand boost is expected to add 100 to 120 bps to the GDP growth over next 4-6 quarters, thereby nullifying the negative impact of higher tariffs on exports to US2. Staples, auto, consumer durables are likely to drive the gains. 30bps downside to CPI inflation at headline level at current basket composition is also expected. The impact will be amplified once the CPI basket changes and becomes more representable to current consumption habits.
- Net revenue loss at 7bps of FY26E GDP for Centre: The total revenue loss of INR 477 bn (13 bps of FY26E GDP) is in line with the INR 500-600 bn estimated*. This shall be shared by both centre and states. The final loss is subject to buoyancy gains.
- Significant push for manufacturing: The rate rationalisation aims to correct the inverted duty structure that exists in key sectors such as textiles.
- Fillip to consumption: The tax rebate that came into effect this year, amid lower inflation, rate cuts along with GST cuts are likely to be positive for consumption in the economy. The impending Pay Commission awards will add further fillip.
Conclusion: The GST rate simplification is a landmark reform that combines ease of doing business with direct consumer benefit. The move is expected to:
- Boost demand across key consumption categories, especially automobiles, consumer discretionary, and services.
- Expand margins in sectors with lower input costs, like consumer staples, cement, and real estate.
- Generate positive spillover effects for financiers and logistics.
- Strengthen macroeconomic stability, with low inflation, higher growth, and no fiscal slippage.
- Overall, this reform should materially improve domestic consumption and provide the much-needed push for the Indian economy, particularly ahead of the festive season.
Investment Strategy:
- Nifty range 24,800-26,000; downside limited.
- GST Reforms, good monsoons, Crude below 70$, lower inflation nos., rural demand pick-up, festival demand, corporate capex acceleration, consistent domestic SIP flow & valuations correction will help boost equity markets in September.
- Expect markets to remain positive with possibility of markets making new highs.