Optimism is growing for Indian equities, fueled by Prime Minister Narendra Modi's recent interaction with Chinese President Xi Jinping and new tax cuts within India. These factors are seen as potential catalysts to help Indian stocks catch up with their emerging-market counterparts.
Modi and Xi met in Tianjin on August 31, pledging to act as partners rather than rivals, covering topics such as border tensions, the resumption of direct flights, and expanded trade. Analysts believe this thaw in relations could benefit India through increased investment inflows, manufacturing expertise, and access to China's clean-energy supply chains. A semblance of peace and stability has returned to the border, which had a lot to do with processes set in motion when they met at a BRICS summit in Kazan last October.
Adding to the positive sentiment are the recent tax cuts implemented by the Indian government. The Goods and Services Tax (GST) Council approved a shift to a two-rate structure and reduced levies on everyday goods to spur demand. A streamlined two-slab GST structure and headline tax cuts are designed to stimulate consumption and simplify compliance. By lowering tax rates, consumer prices fall, demand is boosted, and corporate margins are improved across key sectors like automobiles, FMCG, cement, insurance, and apparel, which should directly enhance earnings and equity valuations.
These tax reforms have the potential to act as a sentiment booster. For example, when corporate tax was slashed in 2019, the Nifty 50 surged nearly 8% in two trading sessions. A GST cut in 2025 could similarly lift sectors linked to discretionary demand and consumption. Lower GST rates may increase household spending and drive consumption growth.
However, some analysts suggest that the benefits of the tax cuts may already be factored into stock prices. Moreover, states may face revenue shortfalls, requiring compensation or spending cuts. If fiscal consolidation weakens, rising bond yields could offset equity market gains. The success of the reform depends heavily on execution, whether firms pass on tax cuts to consumers, and whether compliance improves. The expected demand surge may be muted if the pass-through weakens, limiting GDP uplift.
Despite these challenges, HSBC analysts expect growth to accelerate from the third quarter of fiscal year 2026 onwards. Supportive policies, along with a favorable base, have eased the risks of earnings downgrades and set the stage for foreign investors to return. Lower U.S. rates typically make emerging markets like India more appealing for global investors.
Overall, the handshake between Modi and Xi, coupled with the recent tax cuts, has generated optimism in the Indian stock market. While challenges remain, these developments could provide the necessary boost for Indian equities to close the gap with their emerging-market peers.
