Daily Voice: Anil Rego expects selective GST cuts in sectors hit by tariff impact in August

GST simplification and rate cuts are expected in August, which could provide some relief to consumption-driven sectors. However, with India facing 50% tariffs on Russian oil purchases, the government may need to balance fiscal prudence with targeted support for export-oriented sectors.

We expect selective GST rationalization rather than broad-based cuts, focusing on sectors like textiles, auto components, and pharmaceuticals that face direct tariff impact. The fiscal response will likely be measured, preserving macroeconomic stability while cushioning the most affected segments.

Do you expect the RBI to also act on similar lines by a surprise rate cut, in case there is no deal before the August deadline?

The Reserve Bank of India's monetary policy decision faces pressure from Trump's tariff announcements, creating a complex policy environment. While domestic growth concerns warrant easing, imported inflation through tariffs constrains RBI's flexibility. We had anticipated RBI would maintain a pause in August, prioritizing currency stability and inflation management over growth stimulus. Any rate action would likely come in Q3FY26 once tariff impacts are fully assessed and rupee volatility subsides.

Do you expect strong earnings recovery in the second half despite tariff concerns?

Earnings recovery in H2 will be divergent rather than broad-based, with domestic-focused companies outperforming export-oriented peers. Banking, domestic consumption, and infrastructure sectors should maintain earnings momentum given robust domestic demand. However, IT services, pharmaceuticals, and textile exporters may face margin pressures from tariff headwinds. We expect overall Nifty earnings growth to moderate to 8-10% in FY26, with quality companies in domestic sectors commanding valuation premiums.

Is it better to ignore tariff noise and focus on domestic-focused sectors?

Absolutely, domestic-focused sectors offer better risk-reward in the current environment. Banking, insurance, capital goods, and domestic consumption stories remain insulated from global trade disruptions. We're particularly positive on sectors benefiting from government capex, digital transformation, and premiumization trends. Quality mid-caps in these spaces offer compelling opportunities as they're less correlated with global volatility while benefiting from India's structural growth story.

Do you see any kind of risk from Trump for any sector if there is no deal in the coming months?

• Diamond processing, which employs two million Indian workers and supplies 14 out of 15 cut diamonds globally, faces disruption from 50% tariffs.
• IT services companies with significant US revenue exposure face uncertainty around H1B visa policies and potential service taxes.
• Pharmaceutical companies could see margin compression from both tariffs and potential drug pricing pressures.
• Auto component manufacturers integrated into US supply chains also remain vulnerable to escalating trade tensions.

Do you see any possibility of a major cut in the Fed funds rate, given the pressure from the Trump administration?

Fed Chair Powell confirmed the central bank would have cut rates by now if not for tariff plans, indicating significant policy constraints. Despite Trump's public criticism, the Fed appears committed to maintaining independence and fighting tariff-induced inflation.

We expect the Fed to hold rates through 2025, with only token cuts possible if economic data deteriorates significantly. The Fed's credibility mandate will likely outweigh political pressure, keeping monetary policy tighter for longer.

Do you expect the market to gain momentum from September onward by ignoring tariff-related news?

Markets typically develop immunity to repetitive negative news, and we expect selective buying to emerge by September. Quality stocks trading at reasonable valuations should attract institutional flows as H1 results clarify earnings trajectories. Domestic liquidity remains robust with strong SIP flows providing support at every dip.

We anticipate Nifty to consolidate in the 23,500-25,000 range before breaking out post-festive season, driven by domestic consumption recovery and potential policy clarity.

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