Equity -markets can be right in expecting GST reforms will breathe new life into consumption, which has remained faint for a while. But the most important question remains – will this revival come at the expense of wider macrostability?
It is known that consumption shares have been collected since the GST rationalization announcement. But what about bond markets? Which signals do they send since this Rejig announced from the ramparts of the Red Fort?
The signs are not encouraging. The bond prices have been set and the proceeds have risen since the announcement. An increase in the yields of almost 50-base point from the LOS points of May is certainly alarming. Of course, the initial increase of 10-15 BPS was powered by the rubless attitude of the RBI in the Monetary Policy Review at the beginning of August. However, the majority of the increase came after the start of the tariff tensions and in the midst of falling tax revenues.
Tax collections, in particular in the field of direct tax this year, have been gloomy. The net income taxes contracted 7.5% on 11 August on an annual basis (FY26), while the corporate tax collections have risen only 2.9%, well under budget goals. Against this background, an extra tax slip of 0.15-0.2% of GDP as a result of GST cuts led to having to represent bond markets.
Stock markets seem overly optimistic in expecting a CPI inflation -dip of lower GST rates, which leads to reduction reductions by the RBI. But the behavior of bonds tells a different story. With the basic effect in the second half of FY26, especially in food inflation, and rising currency headwind due to tariff tensions, it is unlikely that the RBI will find room to lower the rates. While a reduction of the RBI cannot be completely excluded, such a movement can aggravate risks for the rupid, already under pressure. The currency of India is in a precarious position this year. The rupid is one of only two currencies of emerging market (EM) – in addition to the Indonesian Rupiah – that were written off in 2025. Others are reinforced, driving on the wave of a weaker American dollar. Most EM -Malutas are appreciated by high sole figures, while the rupee has fallen by more than 2% this calendar year. This did not go unnoticed by stock markets. The overflow of bond and currency markets has had more influence on foreign institutional investors (FIIs) than domestic investors, whose optimism remains largely intact. But FIIs are less forgiving when currencies send mixed signals. It is no surprise that they have been persistent sellers in recent weeks.
While shares appear stable and accessible at the latest, it masks a deeper underperformance. For example, the Nifty is one of only two EM indices (in addition to Brazili’s Bovespa) that falls more than 2.5% this quarter. Double digits were delivered by China and Indonesia. This marks the first time since the Covid era that India underlined the most large EM colleagues. If FII sale continues, it is unlikely that it will reverse underperformance.
India has attracted global investors on the back of strong macro -fundamentals, despite a slow profit cycle. These include stable twin shortages, robust Forex reserves, a resilient currency and favorable dynamics of inflation-interest rate. Any threat to this macrostability can lead to a re-rating of India in the eyes of global investors.
The constant tariff tensions with the US cannot immediately get GDP growth, but they are risks for the macro -relatedness of India, which is carefully built under the current administration. One must take care of them when you play against Uncle Sam – especially if we don’t have as many strategic levers as our tough neighbor, China.
(Arunagiri N, founder CEO & Fund Manager, Trustline Holdings PVT LTD)
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