Equity Market Outlook
Equity markets stayed under pressure in August, marking the second straight month of decline. Global tariff-related concerns, a softer rupee, and weaker-than-expected earnings weighed on sentiment, while foreign portfolio investors continued to pare exposure, particularly in financials and IT. The correction was sharper in the mid- and small-cap space, where valuations had run ahead of fundamentals, leading to profit-taking. Large-caps proved relatively more resilient.
A modest rebound was seen mid-month after the government announced cuts in GST slabs, aimed at stimulating consumption ahead of the festive season. This policy move, together with healthy GST collections and record SIP inflows, reinforced confidence in the strength of domestic demand. Sectorally, autos and consumer-linked segments held up well, while realty, power, and oil & gas underperformed due to global commodity volatility and cautious investor positioning.
Looking ahead, we expect markets to remain range-bound in the near term, with direction set by global developments, inflation data, and the RBI’s October policy review. While volatility is likely, the medium- to long-term outlook remains constructive. Robust manufacturing activity, improving infrastructure spend, and steady household participation through SIPs continue to provide a strong foundation. We remain positive on banking, consumption, and select industrials, while adopting a selective approach in mid- and small-caps given recent volatility.
Debt Market Outlook
The Reserve Bank of India (RBI) held its policy rates steady at 5.50% during its recent Monetary Policy Committee meeting, maintaining a neutral stance amid moderating inflation. Headline CPI inflation has declined to around 2.5%, primarily due to deflation in food prices, with expectations of an inflation rise above 4% in late FY26. Despite external challenges such as trade tariffs and global growth concerns, the RBI reiterated a positive outlook for India’s economy, maintaining its GDP growth forecast at 6.5% for FY26.
India’s Q1 FY26 GDP growth surprised on the upside at 7.8%, driven by frontloaded government spending and robust rural demand. Sectoral expansion was broad-based, with services and manufacturing posting strong gains. However, some divergence in growth indicators suggests future data revisions may be possible. The external sector showed export growth tempered by upcoming tariff impacts, while imports increased sharply.
Significant forthcoming GST reforms aim to simplify the tax structure by rationalizing slabs to primarily 5% and 18%, supporting consumption and easing compliance burdens, particularly for MSMEs and middle-income households. The reforms are expected to boost growth marginally and reduce headline inflation by roughly 20 basis points while posing manageable fiscal challenges.
Liquidity conditions remain ample, with the RBI managing surpluses through targeted Variable Rate Reverse Repo (VRRR) auctions. The domestic bond market saw the benchmark 10-year government bond yield rise to about 6.57% amid weaker auction results, with yields expected to trade in a range of 6.50% to 6.65% as investors balance inflation expectations, monetary policy signals, and fiscal concerns. Technical support and resistance levels are anchoring yields within this corridor amid cautious market sentiment.
Overall, the economic outlook is positive but tempered by inflation risks and external uncertainties. The debt market is navigating a stable yet watchful trading environment as it balances growth optimism with inflation and fiscal risks heading into the remainder of the fiscal year.