GST Reduction Fails to Boost Market Growth

In the midst of global uncertainties and significant foreign institutional investor (FII) withdrawals, the Indian stock markets have remained relatively stable. Despite the recent GST rate restructure, the Indian equity market has underperformed its emerging market (EM) peers for the second consecutive week.

The total FII outflow for the first eight months of 2025 has exceeded the total outflow for all of 2024, a concerning trend that has contributed to the market's underperformance. Nilesh Shah, MD of Kotak Mahindra AMC, has listed key factors contributing to the outflow, including high allocation to India and India's relative valuation premium compared to EM peers.

The slow pace of capital expenditure allocation is a reason why the GST cut has failed to lift sentiment. Tariff uncertainty weakening exports for India is a key worry for investors, as is uncertainty over global trade negotiations, which continues to restrain risk appetite.

In September so far, markets like India, Brazil, Indonesia, Malaysia, Philippines, and Thailand have witnessed outflows, while markets like South Korea and Taiwan have witnessed inflows. The FII outflows are not just a function of domestic cues but also global factors.

The Indian rupee has continued to depreciate against the US dollar, hitting a new low this week. The Sensex is also underperforming, with the Nifty stuck in a tight range below the 25,000 mark. On a 12-month basis, the MSCI India Index is down 10% compared to the MSCI EM Index delivering 18% gains.

Incremental liquidity is being largely channelled into global, China, and Hong Kong funds, with FII selling intensifying in July, resulting in an outflow of over Rs 42,000 crore.

Looking ahead, investors will closely track key macro cues, including the upcoming U.S. jobs report, U.S. nonfarm payrolls, unemployment and inflation data, and the ECB's rate decision, for direction. A multi-asset investment strategy is expected to gain traction in the current environment.

The current market conditions present challenges, but they also offer opportunities for those who are able to navigate the uncertainties and make informed investment decisions. As always, it's crucial to stay informed and to seek professional advice when making investment decisions.