Consumption at the Core, Markets in Recalibration Mode
August month carried the weight of two defining themes: a broad-based GST reform that shifts the growth engine firmly toward consumption, and a volatile equity market grappling with sustained foreign selling on the back of additional US tariffs.

The government remains committed to fiscal consolidation. Even as GST rationalization is set to cost Rs.48,000cr of revenue loss, the same is expected to boost consumption, especially in semi-urban and rural areas and lead to annualised household savings to the tune of Rs.1.8 lakh crs.

Thematic Insight: GST 2.0 - A Demand Catalyst
The government's sweeping GST rationalization, effective 22 September, marks the most consumption-oriented reform in years. Most essentials and everyday categories move down to a 5% slab, while mid-ticket items (TVs, small cars, cement) shift to 18%. Only luxury/sin goods are pushed to 40%.

This is expected to:
Reduce CPI inflation by 0.5%, providing leeway to RBI for one more rate cut
Boost household real incomes, especially in rural/semi-urban markets,
Drive near-term demand across FMCG, autos, durables, and MSMEs,
Reinforce India's pivot from private capex-driven to consumption-led growth in FY26.
Industry commentary is constructive, highlighting both consumer sentiment uplift and fiscal discipline. The festive season will be the first real test of this reform's potency.

Global Crosswinds: Rates, Reforms and Risk Appetite
The sharp escalation in U.S. tariffs (50% on sectors like textiles, gems, and auto parts) highlights the mounting pressure on India to concede in trade negotiations. Yet, in line with a broader Global South stance, India has avoided knee-jerk concessions, choosing instead to accelerate new trade frameworks (UK, Qatar) and lean on domestic demand via GST cuts to soften the blow. For equities, the message is twofold: near-term earnings risk for select exporters, and potential currency depreciation from slower trade-driven dollar inflows. But India's refusal to relent under U.S. pressure underscores a structural resilience - signaling a pivot toward self-reliant growth and insulating broader market sentiment.

Globally, markets remain directionally range-bound, but optimism is building around a potential Fed rate cut in the September meeting. Europe's inflation trajectory is easing, allowing the ECB to keep policy accommodative. Geopolitical tensions stay elevated but haven't spilled over meaningfully into commodity prices this month. For India, this global backdrop of moderating yields but persistent risk aversion has translated into continued FII outflows. Yet, macro stability, bond index inclusion, and domestic liquidity have ensured resilience relative to EM peers.

Sectoral Earnings: Cautious Cuts, Green Shoots
The Q1 FY26 earnings season delivered a mixed bag. NSE500 aggregate PAT grew 10.7% yoy, stronger than the 8.5% in Q4. Energy, cement, and PSU banks led the growth rebound, while private banks, pharma, and utilities moderated.

Yet, consensus forecasts continue to see earnings downgrades: FY26 sales, EBITDA, and EPS estimates were trimmed by –0.5%, –1.3%, and –1.8%, respectively. Importantly, the downgrade-to-upgrade ratio improved to 2.1x in Q1 from 3.5x in Q4, indicating that the long downgrade cycle may be bottoming out.

EBITDA margins across ex-financials held steady at 17.1%, with sequential gains in cement, chemicals, and telecom offsetting weakness in autos and consumer staples. The lagged effect of the 100 bps policy rate cuts so far is expected to filter into earnings from Q2 onward, aided by lower funding costs and improving demand.

Commodities, Currency & Monsoon Impact
Commodity trends have been supportive: crude oil softened, metals remained subdued amid weak Chinese demand, while gold continued to make new highs. INR showed depreciating bias on the back of FII outflows, which is compensating exporters partially against steep tariffs by the US.

On the ground, heavy monsoons disrupted near-term demand in cement, construction, and seasonal categories, delaying rural recovery. The offset is expected in September-October, with festival-linked spending and GST rate cuts likely to provide a strong demand kicker.

Positioning Ahead
As we head into the festive quarter, India stands at an inflection point. Policy support via GST cuts, rate easing and Income tax rebates is aligning with a bottoming earnings downgrade cycle.

We maintain preference for large caps with a constructive view on domestic consumption, while keeping a selective eye on midcaps with earnings visibility and GST-linked demand levers.

Markets are recalibrating, not collapsing. Just as a tree grows stronger through cycles of sun and storm, wealth compounds best through discipline, patience, and thoughtful asset allocation. Staying invested in diversified, high-quality portfolios remains the best way to compound wealth through this transitional phase.



Source: RBI, Bloomberg, Avendus Spark, ABSLAMC Internal Research

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