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The Indian equity markets in August 2025 present a complex picture of recovery and looming challenges. After a prolonged period of decline, spanning six consecutive weeks, the markets demonstrated resilience, staging a comeback in the latter half of the month. This resurgence was not a solitary event but rather the culmination of several positive factors that collectively buoyed investor sentiment. These tailwinds included proposed Goods and Services Tax (GST) reforms, a credit rating upgrade by S&P Global, and a welcome easing of geopolitical tensions. The proposed GST reforms were perceived as a significant step towards simplifying the tax structure and promoting economic efficiency, thereby attracting investor interest. S&P Global's decision to upgrade India's rating further instilled confidence in the country's economic outlook, signaling a positive assessment of its growth potential and financial stability. The easing of geopolitical tensions, although not explicitly detailed in the article, likely refers to a decrease in global conflicts or disputes that could negatively impact market sentiment. Adding to the positive momentum was the encouraging news regarding inflation. July's Consumer Price Index (CPI) inflation eased 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 (RBI) might have more leeway to maintain accommodative monetary policies to support economic growth. The RBI's decision to maintain the repo rate at 5.50 percent further reinforced this view. The central bank also lowered its FY26 inflation forecast to 3.1 percent while maintaining GDP growth projections at 6.5 percent, indicating a supportive macroeconomic backdrop despite lingering volatility. The central bank's stance suggested a balanced approach, aiming to control inflation without stifling economic expansion. Furthermore, there was a glimmer of hope on the geopolitical front, with reports indicating that Russian President Vladimir Putin and Ukrainian President Volodymyr Zelensky were scheduled to hold direct talks to end the ongoing conflict between their countries. Any progress towards resolving the conflict would be viewed positively by global markets, reducing uncertainty and promoting stability. The combination of these factors created a conducive environment for the Indian equity markets to rebound after a period of sustained declines.
Despite the positive momentum, several challenges continue to cast a shadow over the domestic market. One of the most significant concerns is the persistent withdrawal of funds by Foreign Institutional Investors (FIIs). In August alone, FIIs withdrew a substantial ₹15,951 crore, bringing year-to-date outflows to ₹1.13 lakh crore. This large-scale outflow of foreign capital can put downward pressure on the Indian rupee and reduce liquidity in the market, potentially dampening investor sentiment. The reasons for FII outflows are complex and can include factors such as global risk aversion, rising interest rates in developed markets, and concerns about domestic economic policies. Another major challenge is the imposition of 25 percent US tariffs, effective from August 8, with another 25 percent due on August 27. These tariffs pose a significant threat to key export-driven sectors of the Indian economy, making Indian goods more expensive and less competitive in the US market. The tariffs are particularly detrimental to sectors such as auto components, textiles, and electronics, which rely heavily on exports to the US. While consumption-facing industries such as FMCG, retail, and private banks continue to deliver steady earnings supported by strong domestic demand and limited global exposure, export-heavy sectors face competitive disadvantages due to the tariffs. These domestic-focused industries are largely insulated from the direct impact of the US tariffs, benefiting from India's large and growing consumer market. However, even these sectors could be indirectly affected if the tariffs lead to a broader slowdown in the Indian economy. VK Vijayakumar, Chief Investment Strategist at Geojit Investments, cautioned that 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 relationship between India and the US and the potential for further negative developments.
In light of the macroeconomic and geopolitical uncertainties, market experts have outlined strategies for investors to navigate potential volatility while capturing growth opportunities. With valuations stretched and selective opportunities emerging, experts advise focusing on capital preservation. Given the current market environment of a short-term rally and expected near-term volatility, portfolio positioning holds the utmost key. Anirudh Garg, Partner and Fund Manager at INVasset PMS, highlighted that the India–US trade overhang has created selective value pockets. He explained that sectors driven purely by domestic growth—such as consumer discretionary, manufacturing, and financial services—offer compelling accumulation opportunities, particularly within quality mid- and small-caps. Garg added that portfolios should lean towards large-caps for stability, complemented by selective mid and small-caps to capture higher growth potential, while maintaining a tactical liquidity buffer for volatility-led entries, stressing a balanced approach between safety and growth. Echoing a similar sentiment, Trivesh D, COO of Tradejini, emphasised the importance of focusing on large-cap stocks amid current market conditions. He noted that with valuations already looking stretched and limited value opportunities, investors should focus on capital preservation over aggressive growth bets. 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. Om Ghawalkar, Market Analyst at Share.Market, recommended a layered approach: Focusing on core holdings in large-cap domestic consumption names, quality FMCG stocks, and leading private banks, as recent corrections provide attractive entry points. He also suggested defensive plays in IT services and pharmaceuticals, relatively insulated from tariff risks, and selective cyclicals in infrastructure and capital goods benefiting from government capital expenditure, excluding firms with high US exposure. This diversified approach aims to balance risk and reward, taking advantage of opportunities in different sectors while mitigating potential losses from the tariff-affected industries. The experts' recommendations underscore the importance of a cautious and selective approach to investing in the current market environment.
Source: Trump tariff deadline looms: How should you position your stock portfolio? Experts weigh in