In my last blog, I had highlighted that India does not seem to be in the “good books” of Trump. He had hinted at imposing penalty tariffs on India, and on 6th August he did exactly that—raising tariffs to 50%. Such a steep increase has made exports to the US commercially unviable. The new tariff came into effect from 27th August, and its impact on market sentiment was immediate.

Contrary to my earlier expectation, the imposition of tariffs rattled investor confidence. The market witnessed broad-based selling, though volumes were lower than usual. Foreign Institutional Investors (FIIs) continued their heavy selling spree, making India one of the worst-performing markets globally on a YTD basis.

With US–India relations deteriorating, India has adopted a tactical approach by opening dialogue with China and further strengthening its relationship with Russia. This is a clear signal to the US that India is willing to diversify its strategic and trade alignments rather than succumb to pressure.

What is more encouraging, however, is the Indian government’s proactive stance. The government has indicated that it will take whatever steps are necessary to counter the tariff impact and protect growth momentum. Prime Minister Modi’s announcement on GST reduction—details of which should be known by the time you read this—is a critical first step toward stimulating domestic demand by reducing consumer prices.

Of course, a lower GST rate will reduce government revenues and expand the fiscal deficit. But in extraordinary times, a temporary rise in the deficit is an acceptable trade-off to mitigate the larger economic consequences of tariffs. I believe the government should not shy away from using fiscal levers to support growth in the current environment.

On the corporate side, India Inc. closed the June quarter with net profit growth of 9.9%. However, the outlook for the September quarter is less encouraging. The tariff impact, which began in late August, will weigh on September numbers. While monsoons have been good for the third consecutive year, excessive rainfall in certain regions has disrupted economic activity and may affect sowing patterns. In anticipation of GST cuts, some consumers have also deferred purchases, which could further suppress sales in Q2. Rating agencies such as ICRA are projecting 5–6% net profit growth for Q2, but I will not be surprised if the numbers come in even lower.

So, why am I still bullish on the market?

The reasons are multiple. First, I expect strong earnings recovery in H2 FY2026. The 100-bps interest rate cut will provide a meaningful tailwind (though I do not expect further cuts, as the RBI has signaled that inflation may inch higher by Q4 FY2026, and it will also want to avoid putting undue pressure on the rupee). The combination of GST reduction and income tax rebates will directly boost consumption. A good monsoon will support rural demand while also keeping food inflation contained. Together, these factors should fuel a sharp earnings rebound in the second half.

Second, global market dynamics may play in India’s favour. The US equity market is trading at stretched valuations, with forward P/E multiples well above historical averages and a premium to other global markets. The risk of a meaningful correction in the US is high, which could trigger a reallocation of capital from developed to emerging markets—including India.

Third, from a valuation standpoint, the Indian market has already consolidated. Over the last year, equities delivered little to no returns, leading to an erosion of nearly ₹22 lakh crore in market capitalization-despite several IPOs. This consolidation has made valuations in many sectors more reasonable, limiting downside risks while enhancing upside potential. Moreover, India Inc.’s balance sheets remain strong, further supporting a turnaround.

The law of averages also supports a recovery—markets cannot remain directionless indefinitely. Given the improved earnings visibility, supportive policy measures, and resilient macro fundamentals, I believe the Indian equity market is on the cusp of a turnaround.

Therefore, investors should treat every market decline as an opportunity to accumulate rather than withdraw. Despite the weak start to H2, we remain constructively bullish. In our view, the downside is limited, while the upside for equities looks highly attractive over the next 12 months.