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The Indian equity markets experienced a period of volatility in August 2025, initially declining for six consecutive weeks before staging a recovery in the latter half of the month. This resurgence was fueled by a confluence of positive factors, including proposed Goods and Services Tax (GST) reforms, an upgrade of India's credit rating by S&P Global, and a perceived easing of geopolitical tensions. These tailwinds created a more optimistic environment for investors, who had previously been wary of the sustained downturn. The proposed GST reforms were anticipated to streamline the tax system and improve efficiency, thereby boosting business confidence. The S&P Global rating upgrade signaled a strengthening of India's economic fundamentals, making the country a more attractive destination for foreign investment. The tentative signs of de-escalation in geopolitical hotspots, particularly the potential for direct talks between Russia and Ukraine, further contributed to the positive sentiment. The article notes the scheduled meeting between Presidents Putin and Zelensky as a significant potential development, though it acknowledges that the outcome remains uncertain. Beyond these external factors, domestic economic indicators also played a crucial role in the market's recovery. The most notable of these was the easing of July's Consumer Price Index (CPI) inflation to 1.55 percent, marking the lowest level in eight years. This significant drop in inflation provided relief to consumers and businesses alike, suggesting that the Reserve Bank of India's (RBI) monetary policy measures were having the desired effect. In response to the cooling inflation, the RBI maintained the repo rate at 5.50 percent, signaling a commitment to supporting economic growth. Furthermore, the RBI lowered its FY26 inflation forecast to 3.1 percent while maintaining its GDP growth projections at 6.5 percent. This combination of stable interest rates and positive growth outlook painted a supportive macroeconomic backdrop for the Indian equity markets, despite the lingering presence of underlying volatility. The RBI's stance indicated a belief that the economy could sustain its growth trajectory without triggering inflationary pressures, thus creating a favorable environment for investment and expansion.
Despite the encouraging signs of recovery, the Indian equity markets continued to face significant headwinds. One of the most pressing concerns was the persistent outflow of capital from Foreign Institutional Investors (FIIs). In August alone, FIIs withdrew a substantial ₹15,951 crore, bringing the year-to-date outflows to a staggering ₹1.13 lakh crore. This substantial withdrawal of foreign capital put downward pressure on the market and highlighted the vulnerability of Indian equities to global economic uncertainties. Several factors contributed to the FII outflows, including concerns about rising interest rates in developed economies, geopolitical risks, and the perceived unattractiveness of Indian valuations compared to other emerging markets. The article suggests that these outflows are a major drag on the Indian market and need to be addressed to ensure a sustained recovery. The most immediate and potentially damaging headwind was the impending imposition of a 25 percent US tariff on Indian exports, effective from August 8, with another 25 percent due on August 27. This tariff threatened to significantly impact key export-driven sectors, particularly those heavily reliant on the US market. The imposition of tariffs was seen as a major setback for India's trade relations with the US and raised concerns about the potential for further trade restrictions. While consumption-facing industries such as Fast-Moving Consumer Goods (FMCG), retail, and private banks continued to deliver steady earnings, supported by strong domestic demand and limited global exposure, export-heavy sectors, including auto components, textiles, and electronics, faced competitive disadvantages due to the tariffs. The tariffs would make Indian exports more expensive in the US market, potentially leading to a decline in sales and profitability for these sectors. The article emphasizes the uneven impact of the tariffs, highlighting the resilience of domestically focused industries while underscoring the vulnerability of export-oriented sectors. VK Vijayakumar, Chief Investment Strategist at Geojit Investments, succinctly captured the prevailing sentiment, stating, "There is no scope for a sustained rally since the August 27th deadline for the 25 percent secondary tariff on India is fast approaching, and the news coming from the Trump administration is not positive." This statement underscores the significant uncertainty surrounding the trade situation and its potential to derail the market's recovery.
Faced with a complex landscape of macroeconomic and geopolitical uncertainties, market experts have offered strategies for investors to navigate potential volatility while capitalizing on growth opportunities. Given the stretched valuations and the emergence of selective opportunities, the primary focus is on capital preservation. As Anirudh Garg, Partner and Fund Manager at INVasset PMS, pointed out, the India–US trade overhang has created selective value pockets. He emphasized that sectors driven purely by domestic growth, such as consumer discretionary, manufacturing, and financial services, present compelling accumulation opportunities, especially within quality mid- and small-cap companies. Garg advised investors to tilt their portfolios towards large-cap stocks for stability, complemented by selective mid- and small-cap investments to capture higher growth potential, while maintaining a tactical liquidity buffer for volatility-led entries. This approach seeks to balance safety with growth, recognizing the inherent risks and opportunities in the current market environment. Trivesh D, COO of Tradejini, echoed a similar sentiment, stressing the importance of concentrating on large-cap stocks amid current market conditions. He argued that with valuations already stretched and limited value opportunities available, investors should prioritize capital preservation over aggressive growth strategies. "Large-cap stocks with stable earnings and strong fundamentals carry a lower risk of steep declines," Trivesh D said, highlighting the need for caution in high-risk segments. The recommendation to focus on large-cap stocks reflects a desire for greater stability and predictability in the face of market turbulence. Large-cap companies tend to be more resilient during economic downturns and are better positioned to weather external shocks. Om Ghawalkar, Market Analyst at Share.Market, proposed a layered approach to portfolio construction. He recommended focusing on core holdings in large-cap domestic consumption names, quality FMCG stocks, and leading private banks, as recent corrections offer attractive entry points. He also suggested defensive plays in IT services and pharmaceuticals, which are relatively insulated from tariff risks and now present better risk-reward after price pullbacks. Finally, he recommended selective cyclicals in infrastructure and capital goods firms benefiting from government capital expenditure, excluding companies with significant exposure to US markets. This diversified approach seeks to mitigate risk while capturing growth opportunities across different sectors. The emphasis on defensive sectors like IT and pharmaceuticals reflects a desire to protect portfolios from the negative impact of the trade war. The inclusion of selective cyclicals in infrastructure and capital goods is based on the expectation that government spending on infrastructure projects will continue to drive growth in these sectors.
The proposed investment strategy highlights a combination of strategies focused on core holdings, defensive positioning, and selective cyclical plays. Core holdings are considered to be the foundation of a strong portfolio providing stability and consistent returns. These holdings primarily include large-cap companies focusing on domestic consumption and quality Fast-Moving Consumer Goods (FMCG) stocks and leading private banks. The rational to focus on these sectors is because of the strong domestic demand and stability within the sectors. These sectors are largely insulated from global volatility and the corrections in prices allows for attractive entry points. The strategy further suggests defensive positions in IT services and pharmaceuticals sectors. These sectors are considered to be relatively less susceptible to tariff risks while also providing good opportunities for rewards after recent price corrections. By incorporating these defensive sectors into the portfolio, investors can protect their portfolios from the potential harm caused by a trade war. Furthermore, incorporating selective cyclical stocks in infrastructure and capital goods sectors that benefit from government capital expenditure could improve performance. However, caution is advised with respect to companies heavily exposed to the US market to safeguard against tariff threats. Investors should take into account that government capital expenditure is vital in promoting infrastructure and capital goods firms. To sum up, the investor strategies, the choice of portfolios, and the sectors that require investment need careful examination. The looming tariff deadline and the complex market conditions require a strategy that aims for safety and growth. While domestic sectors and large-cap companies provide stability and consistent earnings, IT, healthcare, and infrastructure-related companies also provide some level of defense as well as cyclical upside potential. Investors can manage volatility and take advantage of emerging opportunities in the market by following a layered approach and maintaining liquidity.
Source: Trump tariff deadline looms: How should you position your stock portfolio? Experts weigh in