Outlook for the Month of September’25

Economy Review

The key events in the month were –

1. Domestic Factors –

a) GST 2.0 – The GOI has announced GST 2.0 which is a broad rationalization of GST rates and the elimination of compensation cess for most goods, with effect from 22nd September’25. The GST council has abolished the 12% and 28% GST rate, resulting in most items of mass consumption at lower GST rates of 5% and 18%, while select luxury and sin goods taxed are at 40%, effective. The compensation cess on most products will be abolished except for tobacco.

b) GDP – GDP came in at a five-quarter high at 7.8% in Q1FY26 with a turnaround in government consumption expenditure and continued momentum in gross capital formation. Private consumption also improved.

c) CAD – The current account in Q1FY26 moved back to a deficit of $2.4 bn (0.2% of GDP) from surplus of $13.4 in Q4FY25 as the trade deficit widened and net invisibles softened from 4QFY25.

d) Services PMI – India’s Services PMI for August’25 rose to 62.9 vs. 60.5 in the last month indicating steepest expansion since June’10.

2. Global Factors –

a) Federal Reserve – The US FED kept the policy rates unchanged from 4.25-4.50%.

b) US Tariffs – The US imposed another 25% duty on Indian exports taking total tariff to 50%, citing India’s refusal to stop buying Russian crude and defense hardware.

c) Crude Oil – Brent crude oil prices corrected 7% during the month of August’25 as OPEC+ announced significant output hike.

Domestic Macro Economic Data

Inflation – India’s CPI Inflation eased to an 8 year low of 1.6% in July 2025 due to decline in prices of vegetables and pulses. India’s WPI inflation fell to -0.6% in July’25 due to low food and fuel inflation.

Outlook for Equities
Nifty declined 1.4% in August’25 due to implementation of steep US tariffs on Indian goods. Mid-cap and small-cap indices underperformed large-caps and were down 1.9% and 4.1%, respectively. The Indian equity market continued to underperform global equity markets.

The US imposed another 25% duty on Indian exports taking total tariff to 50%, citing India’s refusal to stop buying Russian crude and defense hardware. On the domestic front, The GOI has announced GST 2.0 which is a broad rationalization of GST rates and the elimination of compensation cess for most goods, with effect from 22nd September’25. The GST council has abolished the 12% and 28% GST rate, resulting in most items of mass consumption at lower GST rates of 5% and 18%, while select luxury and sin goods taxed are at 40%, effective. This big GST reform will boost consumer sentiment and provide a consumption fillip. Real GDP surprised on the positive side for Q1FY26 at 7.8% due to low deflator. FIIs sold during the month of August’25 $3.3bn worth of equities whereas DIIs bought $10.8bn of equities.

We expect a strong consumption boost post the GST reform for FMCG, Autos and Consumer Durables in the festive season ahead. We expect Nifty earnings to grow at ~12-13% CAGR over the medium term. Nifty is currently trading at ~20x FY27e P/E. Investors can continue to invest in equities from a medium to long-term perspective.

Outlook for Debt
In August RBI MPC unanimously kept the policy repo rate unchanged at 5.5% while maintaining the stance at “neutral”. Real GDP growth estimate for FY2026 was unchanged at 6.5% while estimating Q1FY27 GDP growth at 6.6%. Average inflation estimate for FY2026 was revised down by 60 bps to 3.1% while projecting Q1FY27 headline CPI at 4.9%. MPC came across as positioning for a long pause while the minutes were relatively dovish. In the minutes MPC members highlighted the need for a pause to allow the transmission of policy actions while remaining wary of evolving external sector uncertainties. While Dr Gupta ruled out the scope for any further rate cuts, given the growth-inflation dynamics, other members emphasized a data-dependent approach as global uncertainties evolve.

The government announced a broad rationalization of GST rates and the elimination of compensation cess for most goods, with effect from 22nd September’25. Government expects a revenue impact of Rs 480bn which is lower than initial estimates of the revenue and fiscal impact which was over Rs. 1tn. Full passthrough of rates may lead to annualized household savings of around Rs 1.8tn and may result in an uptick in mass consumption items volumes.

S&P Global upgraded India’s sovereign rating to BBB from BBB-, while keeping the rating outlook stable. The upgrade was driven by the government’s commitment to fiscal consolidation while continuing productive infrastructure spending. July CPI inflation moderated to 1.6% YoY due to a contraction in food prices led by a sharp decline in prices of vegetables, pulses and spices. Core inflation eased to 4.1%. WPI inflation for July was at (-)0.6% YoY. Goods trade deficit widened to US$27.3 bn in July, driven by expansion in both exports and imports. Till 29th August’25, cumulative rainfall was 6% above long-term average and total kharif acreage was 3.4% higher than the same period last year led by rice sowing. Q1FY26 real GDP growth was at 7.8% largely due to a low deflator.

The minutes of the meeting of the July Fed FOMC meeting, released mid-last week were hawkish, where most members except two showed concerns over inflation rising due to the impact of tariffs. Later in the week, however, Fed Chair Powell’s Jackson Hole address sounded more dovish opening the room for a September rate cut, as it focused on the softening in the labor market and alluded to tariff-induced price rises as a one-time adjustment. Probability of a 25bps September rate cut by FOMC stands at 96% now. ECB has shown a relatively milder tone with future rate cut probabilities shifting towards 2026. Brent crude oil prices corrected 7% during the month of August’25 as OPEC+ announced significant output hike.

Markets in the near term await impact of GST headlines on rates, projections on fiscal deficit target, CPI data, festive season spend as well as impact of monsoon. Floods in few states could damage crops and consequently impact food inflation. Additionally, further negotiations on trade deals, oil prices, FPI flows and currency movements are also crucial. Globally FOMC decision and labour market data from US will be watched for further cues on rate direction. Benchmark 10 year Gsec closed at 6.59% on 29th August’25, 22 bps higher during the month. 10 year Gsec yield is likely to be in a range of 6.45%-6.65% in the near term. Spread of 10 year Gsec with corporate bonds is nearly 60 bps and likely to remain between 55-65 bps.