Indian equities started the month on a strong note amid positive news on GST rationalization, strong economic momentum and a 25 bps rate cut by the US Federal Reserve. However, this momentum was disrupted by a sharp market decline following the US administration's announcement of a onetime fee of US$100,000 on new H-1B visa petitions and a 100% tariff on branded drug imports. Consequently, the BSE Sensex and Nifty 50 ended the month with small gains of 0.6% and 0.8%, respectively. The mid and small-cap indices outperformed, with the NSE Midcap 100 rising by 1.4% and NSE Smallcap 100 gaining by 1.9%. At a sector level, metals, auto and oil & gas indices ended higher while consumer durables, IT and FMCG indices declined.

Bond yields traded in a narrow range over the month with the 10-year benchmark government bond yield rising 4 basis points to end at 6.57%. In contrast, US Treasury yields edged lower, with the 10-year yield ending the month at 4.15%, following interest rate cuts by the US Federal Reserve (Fed).

Key Market Events

RBI keeps rates unchanged : The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) unanimously decided to keep the policy repo rate unchanged at 5.5%, maintaining a neutral stance. The real GDP growth forecast for FY2026 has been revised upward to 6.8% from 6.5%, while 1QFY27 GDP growth is projected at 6.4%. Meanwhile, the average inflation estimate for FY2026 has been lowered by 50 basis points to 2.6%. Additionally, the policy introduced regulatory measures aimed at strengthening the financial ecosystem and promoting the internationalization of the Rupee.

Banking liquidity remains in surplus : Liquidity has remained in surplus since the end of March 2025 and is expected to remain comfortable till January 2026 aided by drawdown of government cash balance and infusion of ~INR 2 trillion by the remaining 75 bps of CRR cuts. There was a small move into deficit in September due to GST related outflows.

As per RBI's revised liquidity management framework, it will discontinue the 14- day variable rate repo (VRR) and variable rate reverse repo (VRRR) operation and instead will manage liquidity primarily through 7-day VRR/VRRR, with other tenors upto 14-days to be used as per its discretion.

Banking liquidity remains in surplus : Liquidity has remained in surplus since the end of March 2025 and is expected to remain comfortable till January 2026 aided by drawdown of government cash balance and infusion of ~INR 2 trillion by the remaining 75 bps of CRR cuts. There was a small move into deficit in September due to GST related outflows.

As per RBI's revised liquidity management framework, it will discontinue the 14-day variable rate repo (VRR) and variable rate reverse repo (VRRR) operation and instead will manage liquidity primarily through 7-day VRR/VRRR, with other tenors upto 14-days to be used as per its discretion.

GST rationalization bodes well for durables and autos : GST rationalization is expected to gradually stimulate demand, with the auto sector already showing early signs of recovery ahead of the festive season. This positive momentum is likely to extend to other segments such as FMCG, consumer durables, cement, and broader discretionary categories, supported by rural recovery and recent direct tax relief measures. Additionally, the upcoming festive period is anticipated to further boost consumption across sectors, with rising expectations already evident in both the automobile and staples segments.

Valuations off high, premium to EM falls : Given the rangebound movement in markets, valuations have come off the highs. On a relative basis, India's premium to global and emerging markets is off higher levels. Such relative valuation premium levels of India to peers are nearly the lowest in four to five years. Yet, India remains one of the most expensive markets globally, only trailing the US.

Equity Market View:

Policy-driven catalysts could once again act as a turning point - the impact of GST reforms and the prospect of a favorable trade agreement with the US may serve as significant tailwinds in boosting economic activity including consumption.

Against this backdrop, we continue to be overweight the consumption theme. If the macro tailwinds are effectively passed on to end consumers, they could reset India's consumption cycle. We are already seeing a high number of purchases in the discretionary segment such as automobiles and consumer durables. This also coincides with the festive season.

We also remain constructive on other consumer discretionary plays-especially in retail, hospitality, and travel & tourism-which are poised to gain from strengthening domestic momentum and festive season demand.

We have increased exposure to automobiles on the back of GST reforms and companies in this space have been quick to pass on the benefits to consumers. The trend toward premiumization is expected to strengthen, supported by a pickup in the replacement cycle. GST cuts are likely to reduce passenger vehicle (PV) prices by 5-10% and two-wheeler prices by around 8%, which should stimulate demand. We anticipate that aspirational product segments will benefit more due to higher demand elasticity. While improved affordability will encourage first-time buyers, we believe the revival in replacement demand-muted in recent years-will be a more significant growth driver for Pvs.

Debt Market View:

The Fed's 25 basis point rate cut in its September 2025 policy meeting provided a supportive backdrop for Indian bond markets. This move contributed to a flatter yield curve, largely driven by expectations of reduced supply in longer-dated government securities (G-Secs). The government revised its borrowing calendar, trimming the supply of longertenor government bonds by 5% and reallocating issuance toward the 3- year, 5-year, and 10-year segments. Consequently, bond yields remained range-bound throughout the month.

With 100 bps of repo rate cuts already delivered, we believe the majority of the RBI's rate easing is now behind us. We believe that the best of the duration play is behind us. Given that inflation expectations remain well within the central bank's target range, we foresee a "lower for longer" interest rate environment.

Fiscal concerns on the back of GST cuts coupled with worries on end of ratecut cycle, led to an increase in the yields over the past few weeks. However in the near term, markets will be guided by lower inflation, pressures on growth, likely OMOs during Jan-Mar 2026 and possibility of inclusion in Bloomberg indices, which may provide a tactical opportunity for long bond investing.

We have been focused on the short term 2-5 year corporate bonds in the portfolio as we expect surplus banking liquidity, lower supply of corporate bonds/ CDs due to slowdown and delay in implementation of LCR guidelines and attractive spreads and valuations. Incrementally short bonds can outperform long bonds from risk-reward perspective due to a shallow rate cut cycle, lower OMO purchases in the second half of the year and a shift in focus to Govt Debt to GDP targets.

Source: Bloomberg, Axis MF Research.