Indian stock market remains well-positioned over the next two to three quarters despite global uncertainties, with the proposed GST rationalization emerging as a pivotal trigger, according to Seshadri Sen, Head of Research and Strategist at Emkay Global Financial Services Ltd.
Sen notes that while the concerns over high US tariffs on Indian goods and external volatility may cause near-term choppiness, the domestic earnings cycle is bottoming out, supported by strong fiscal and monetary stimuli.
“Elevated multiples are not a major worry unless earnings surprise us on the downside from here – which we see as unlikely. Domestic flows remain robust and there are no signs of weakening – this offsets the FPI and promoter selling to a large degree. There may be some choppiness in the short term until earnings visibility emerges: we see any significant correction as an entry opportunity,” Sen said in a strategy report.
The market’s next leg up hinges on the structure of GST rationalization. While Sen expects it to be a net positive, offsetting measures such as higher sin taxes or spending curbs could dilute its effectiveness. On the global front, clarity on US tariffs is awaited, with the risk of a 50% levy remaining high. However, easing tensions with China may provide partial relief.
Promoter Selling a Key Risk
Promoter share sales surged to ₹18,700 crore in July 2025, up sharply from ₹5,800 crore in May, nearing levels last seen in September 2024 – just before a steep market correction. This wave of exits, coupled with volatile FPI flows, weighed on net FDI despite healthy gross investments.
“The saving grace was the strong mutual fund flow, which was up 8% MoM in July 2025 to ₹47,000 crore – we think this momentum will sustain and protect the market from any sharp selloff,” Sen said.
Earnings Cycle Stabilizing
Nifty’s FY26 / FY27 earnings projections have been relatively resilient despite a weak earnings season, with a mere ~2% downgrade during Q2FY26. The share of companies with +10% EPS downgrades fell to 16% from a peak of 26% in Q2FY25. Emkay expects Nifty EPS growth of 9% in FY26, driven primarily by Materials and Energy, with potential upside from consumer discretionary as consumption revives.
Valuations Supported by Stimulus
While Nifty and SMID indices trade near one standard deviation above long-term averages, Sen argues that valuations are sustainable. Multiple pro-cyclical supports are at play, including welfare spending by states, income tax cuts in the FY26 Union Budget, 100 basis points of policy rate cuts, and liquidity injections, along with the anticipated GST rationalization.
Model Portfolio Changes
Emkay Global added KFin Technologies to its model portfolio, increased weights in Maruti Suzuki India, Shriram Finance, and Mphasis, while exiting Bharti Airtel and Motilal Oswal Financial Services.
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