Benchmark indices edged higher on Monday as the proposed goods and services tax (GST) revamp lifted hopes of boosting domestic consumption. Adding to the momentum were India’s sovereign ratings upgrade and a temporary relief for countries importing Russian oil.
The Nifty 50 index ended Monday at 24,876.95 points, up 1% or 245.65 points, its highest gain since 23 May. The Sensex closed 0.83% higher at 81,273.75 points.
Chirag Mehta, chief investment officer at Quantum Mutual Fund, said that while the GST rationalization announced on 15 August could drive up consumption, in the near term reduced collections could strain government finances. However, the expectation is that stronger demand will eventually make India’s economic growth more sustainable, he said.
Consumption heavy sectoral indices gained on Monday. Nifty Auto closed 4.18% higher, Nifty consumer durables gained 3.38%, and Nifty Realty ended the day up 2.17%.
“With external conditions volatile, the government’s focus is on strengthening internal demand which compliments earlier tax cuts and lower interest rates,” said Mehta.
The reduction in GST slabs to two from four is expected to be supportive for sectors such as insurance, consumer durables, auto, and cement, said Aparna Shanker, CIO, equity, at The Wealth Company Mutual Fund.
The proposed changes to the GST structure, however, could hurt demand in the short-run for the auto industry, other experts said.
Uncertainty around when the new GST tax rates will be implemented may prompt customers to defer purchases, potentially affecting demand during regional festivals such as Ganesh Chaturthi in Maharashtra (end-August) and Onam in Kerala (late August to early September), said Kumar Rakesh, analyst–information technology and auto, BNP Paribas, in a report dated 18 August.
Prolonged uncertainty could also lead to inventory challenges, as several manufacturers have begun building stock ahead of the festive period, he added.
Prime Minister Narendra Modi on 15 August said the GST reforms would be implemented by Diwali, targeting a significant reduction in taxes on everyday items, as a “Diwali gift” for the common man.
A day earlier, 14 August, India won its first sovereign rating upgrade from S&P Global Ratings since 2007.
Bottom of the pack
Morgan Stanley said in a report dated 4 August that while a soft patch in earnings growth appeared to be fading, and despite a dovish central bank, investor confidence may hinge on greater clarity around the external environment and the GST rate rationalization.
However, foreign institutional investors remain uncertain towards India. FIIs pulled out equities worth $182.9 billion in August and $285.2 billion in July, as per Bloomberg.
As per an Asia Fund Manager Survey by BofA Global Research, within Asia, Japan continued to be the most favored market by a significant margin, with China leaping to the second spot, followed by Taiwan and Korea.
India tumbled to the bottom of the pack, chiefly because of US President Donald Trump’s proposed 50% tariff on Indian goods.
On Monday, the Nifty Midcap index closed 1.9% higher at 21,267.05 while the Nifty Smallcap index climbed 1.33% to 16,878.7.
For Nifty 50, the zone of 24,800-24,770 will act as an important support, while on the upside, the zone of 25,000-25,050 will act as a crucial hurdle, said Sudeep Shah, head–technical and derivatives research, SBI Securities.
Any sustainable move above the 25,050 level will lead to a sharp upside rally up to the level of 25200, he added.
