The Nifty declined 1.4% in August while mid-cap and small-cap indices underperformed large-cap index and were down by 2.9% and 4.1%, respectively. Sentiment remained cautious following the implementation of steep US tariffs on Indian goods. Consumption-oriented sectors saw a rally on the government’s plan for rationalization of GST rates and possibility of further reforms. Auto and consumer durables sectors were up 5.8% and 2%, respectively. Oil & gas, power and realty were down by 4.7%, 4.6% and 4.5%, respectively.

High-frequency data for August remained mixed, similar to the trend of previous months. GST collections growth slowed to 6.5% YoY. Manufacturing PMI rose to 59.3 in August, while services PMI ticked up to 62.9 (highest since June 2010). The cumulative rainfall for the country as a whole was 7% above the LPA as of Sep 2 while overall summer crop sowing activity (as of Aug 22) rose 3.4% YoY. Credit growth was stable at 10.2% YoY in August. Power demand recovered to a 5-month high of 4.3% YoY. Vehicle registrations improved across both two-wheelers and passenger vehicles in YoY terms. Air passenger traffic was soft.

For 1QFY26, BSE 500 sales/EBITDA/PAT growth stood at 7%/8%/10%. The same Ex-fin was 5%/8%/9%. The earnings growth for 1QFY26 for large/mid/small-cap is 8%/18%/5% (ex-fin). Mid-caps have outperformed in the past 2 quarters, while small-cap earnings have been volatile. Sectors that outperformed the larger universe include Cement, Chemicals and Metals, while the underperforming sectors included Power, Automobile, Textiles. Overall, Adj. PAT growth over last four quarters has shown improving trend. Though the downgrades to estimates continue, but some green shoots appeared, with downgrade/upgrade ratio improving compared to previous 2 quarters.

As apprehended in our previous communication, the Indian market continued its subdued streak and its underperformance to EM/DMs continued as the US brought into effect its threatened 50% tariffs on Indian exports. This is likely to have a deleterious impact on a few labor-intensive sectors such as textiles, gems and jewellery, footwear etc. While this will be partly offset by the Governments timely move on GST reforms, it is likely to keep up the pressure on overall earnings growth for corporate India and may lead to some difficult choices for the Government in balancing the fiscal.

US’s Treasury yields remained volatile during the month but managed to decline by 15-20 bps across the curve. Even as US’s CPI came elevated, weaker than expected jobs market data triggered market expectations of September rate cut by Federal Open Market Committee (FOMC). Dollar index also cooled off during the month, in line with treasury yields.

Contrary to the global trend, domestic G-Sec yields witnessed one of the worst months and surged rapidly by 20-30 bps with steepening bias. First the hawkish pause by RBI in its August policy and then the fiscal concerns due to domestic growth slowdown amid US’s higher tariff on Indian goods, prompted a big sell-off. Elevated State Development Loans (SDLs) supply further worsened the situation leading to huge tail in primary auctions. Sentiments remained subdued despite the sovereign rating upgrade by S&P’s after 18 years. Corporate bond yields also inched up but to a lesser extent as the fresh supply remained muted amidst heightened volatility

Outlook

Global backdrop remains volatile & fast evolving as US’s tariff policies are getting unfolded. US’s non-farm payroll data has again come weaker than expected thereby re-igniting the hopes of FOMC’s policy rate cut in upcoming September meeting. FOMC’s Chairman Powell during his Jakson Hole speech, indicated that the Fed is shifting towards a more accommodative stance because new risks (on jobs market) have arisen. Russia -Ukraine conflict continues to linger upon without any concrete visibility on peace talks. Even as US’s treasury yields have come off sharply, they may still remain volatile amidst inflation worries led by higher tariffs, timing of next rate cut and fiscal concerns.

RBI’s MPC delivered a hawkish pause in its August policy after cutting it by a cumulative 100 bps over the previous three meetings & continued with a neutral stance. Even as FY26 CPI inflation projections were lowered by 60 bps to 3.1%, continued higher projections for 4QFY26 & 1QFY27 at 4.4% & 4.9% respectively, prompted a cautious commentary. Recent 1QFY26 GDP print came in at 7.8%, beating all estimates which further pushed out the rate cut expectations. As of now, the bar for any future rate-cut has been set higher.

India has been the most hit with US’s 50% tariff on Indian goods (including penalty for importing Russian crude) which has led to the INR coming under pressure. This also triggered fiscal concerns amidst already subdued tax collections so far and now the growth impact due to higher tariffs. Market fears indeed came true when the honourable Prime Minister announced the proposal of GST rate cuts on Independence Day which could result in revenue loss for both the Centre as well as the State Government.

Now the GST council has provided much more clarity in terms of the GST changes and the subsequent fiscal impact. As per the estimates, the total fiscal impact has come out to be much lower at Rs. 48,000 crores against the feared much higher a number of Rs. 1.6 – 18 lac crores. Contrary to the market belief that GST reduction has been done in order to support growth against the recent challenging global backdrop, we believe that it is a major GST reform undertaken after a comprehensive planning and will have a limited fiscal impact. As seen in the past, lower tax rate helps in higher tax buoyancy as the consumers tend to aspire for higher value-added products in the higher tax bracket. Additionally, tax compliance also improves with lower GST rates. Proposed GST rate cuts will also help in lowering the inflation trajectory and as per the initial estimates, it could bring down the headline inflation by 40-50 bps considering that the entire benefit of GST rate cuts is passed on to the consumers.

Overall, risk reward has turned favorable now for allocation in duration-oriented strategies. The sharp surge in domestic yields over last 3 months has left the curve somewhat dislocated. We believe markets have overreacted to these developments especially on the fiscal front and there is a room for yields to retrace lower once greater clarity emerges on the fiscal and macro front. GST rejig has dispelled immediate concerns on any major fiscal spillover, at-least for now and this can act as a trigger to ignite investor demand at currently elevated yields. On fiscal front, another key event will be the 2HFY26 G-Sec borrowing calendar to be announced by September end. If the Government maintains the borrowing program as per the budgeted numbers, it will further help in validating the Govt’s fiscal prudence.

From favorable risk-reward perspective, we remain fundamentally constructive on the 5–10 Year government bond segment for its potential capital gains and 2–5 Year corporate bond space for its stable carry. For tactical investment opportunities, one may consider allocating to Government Securities (G-Secs) with maturities exceeding 10 years. G-Sec yield curve has steepened sharply with recent fiscal concerns and subdued demand in the longer end as of now which has resulted in 30 yr Gsec to surge to an absolute yield of ~7.25% - 7.30% - a spread of ~70 bps over 10 yr G-Sec. We expect the real demand from long investors like Insurance, PFs and EPFOs to pick up in second half of FY26 which will trigger a spread compression in the longer end of yield curve.