Changing Dynamics: Can Nifty, Sensex Rally Further?

Prime Minister Narendra Modi, in his recent Independence Day speech, announced a major overhaul of the Goods and Services Tax (GST) system scheduled for rollout by Diwali. The government also reiterated the rollout of the Employment Linked Incentive (ELI) Scheme (link) , aimed at supporting formal job creation.

Together with GST rationalisation, the scheme is intended to boost disposable incomes and employment. This, coupled with the India upgrade by S&P and a potential likely pausing the 25% punitive tariffs on India’s exports to the USA could all aid sentiment.

The question on everyone's mind is that are the recent developments enough for a sustained market rally? While it is foolhardy to predict the index, picture this:

MSCI India has underperformed MSCI EM by a significant margin, not necessarily only because of the tariff tantrums by Donald Trump, but also because of growth concerns.

The latest math shows an underperformance of 17% over the last one year. Valuation premium, derived by dividing the MSCI India PE with the MSCI EM PE, is the lowest since April 2021. Putting it differently, the ratio of India PE to EM PE is 1.48 right now, whereas the 10 year average ratio stands at 1.78.

There are other reasons to be constructive. China’s finance minister, Wang Yi, is visiting India (Aug 18–20) — the second such meeting since the 2020 Galwan clash. The aggregate earnings, as per Motilal Oswal Research, grew 11% YoY (versus estimates of 9% YoY) in Q1FY26.

Taher Baadshah of Invesco AMC spoke about how this quarter sets India earnings up for a double-digit growth in the exit quarter of FY26. Valuations are not outright cheap, but have gone through value correction in the last few quarters.

 Market analysts are also constructive. Citi believes the GST rationalisation, in addition to earlier announced measures, should boost festive demand and the FY27 earnings outlook – which is keenly watched.

Emkay believes India’s GST rationalisation is a growth-accretive, big-ticket reform. They see this as a major market mover and upgrade our Nifty target to 28,000 for Sep-26, while recommending investors to play this through auto and cement.

The second-order benefits are key: this speeds up formalisation of the economy and improves the competitiveness of Indian companies. Dolat Capital is recommending clients to invest in names Kotak and ICICI, cement names like Ultratech and JK Cement, Consumer durables like Polycab and Amber as well as discretionary consumption names like Bharti, Titan, Trent, and Asian Paints.

Are the markets set for a further upside? One can argue that if the global news does not become unfavourable, arguments can be made for a sustained move.

The portfolio strategy may be to shift from a capex-tilted portfolio to a consumption-tilted portfolio. However, those nuances notwithstanding, the idea of a break of the downtrend is not unfathomable. The market feels that the need of the hour is a fix on growth from within. The GST announcements may have just shown the light at the end of the tunnel.