The Nifty was up in September with a modest gain of 0.8%. Mid-cap. (+1.4%) and small-cap. (+1.9%) indices ended marginally higher. The month started on a positive note due to the GST rate cut being on expected lines and upbeat festive demand. However, the market witnessed moderation on Trump administration’s decision to impose a one-time fee of US$100,000 on new H-1B visa petitions and a 100% tariff on branded drug imports, which affected sentiment negatively. Sectoral indices ended mixed. Auto, Energy and Banking indices were up 6%, 4% and 2%, whereas IT, FMCG and Pharma indices declined 4%, 2.5% and 1.6% respectively.

High-frequency data  remained mixed in September, impacted by seasonal trends. GST collections edged up to INR 1.89tn in September, while the growth rate picked up to a 4-month high of 9.1%YoY, vs 6.5% in August. Net GST collections, however, moderated to 5%YoY in September vs 10.9% in August. Manufacturing PMI slowed to 57.7 in September, while services PMI ticked down to 60.9, due to slower increase in new business and weak international sales. Credit growth picked up to 10.4% YoY in September, the highest since Apr-25, vs 10% in August. In wholesale terms, two-wheeler sales moderated a tad, while passenger vehicle sales rose. Though overall monthly vehicle registrations (retails) for both two wheelers and 4 wheelers were weak, there has been healthy acceleration across both, in the two weeks of the festive period thus far. Air passenger traffic weakened both on a MoM and YoY basis. While some activity indicators have softened, we believe this is mainly due to disruption to production activity on account of higher rainfall and the 16-day period of 'pitru-paksha', (inauspicious period for discretionary purchases) falling in the month of September.

While markets have seen some relief this month, near-term upside on frontline indices appears restricted until India remains geo-economically disadvantaged due to high US tariffs. We however reckon, this will only encourage the Govt and RBI to be more liberal and activate as many domestic levers – such as easier flow of credit, lower interest rates and taxes to spur the domestic economy. Specifically, we see the consumption sector as one of the biggest beneficiaries in this market cycle as it is the largest segment of GDP (60%) and is relatively insulated from the direct impact of tariffs. A combination of strong structural trends and unfolding fiscal triggers besides cyclically low valuations, increase the probability of strong returns in the medium term from this sector.

With regard to overall earnings, market expectations are for earnings growth to move close to the 10% mark in 2QFY26 (modestly better than the last 3-4 quarters) though this may still be short of the 12-15% aspirational growth to support current valuations. A more pronounced earnings acceleration may likely get deferred starting early part of FY27. We however see pockets of stronger growth such as in banking, consumption, healthcare, power and parts of manufacturing and are portfolios are positioned accordingly. We believe high-conviction, bottom-up orientation of strategies will likely yield better results in the present economic scenario.

US’s Treasury yields rallied before the FOMC’s mid-month policy and even as FOMC delivered the first 25 bps rate cut of CY2025, yields inched up post policy on FOMC’s balanced & data dependent approach for forward policy actions. Dollar index also moved in line with treasury yields during the month. Domestic G-Sec yields reversed the hardening trend of previous three months and rallied by 10-15 bps across the curve as GST rate cut led fiscal implication came much lower than expected. However, 10 yr G-Sec benchmark yield closed flattish as the participants trimmed positions ahead of 2HFY26 G-Sec borrowing calendar in anticipation of higher supply in 10 yr segment. Corporate-bond yields underperformed the G-Sec and witnessed a yield curve steepening.

Contrary to the global trend, domestic G-Sec yields witnessed one of the worst months and surged rapidly by 20-30 bps with steepening bias. First the hawkish pause by RBI in its August policy and then the fiscal concerns due to domestic growth slowdown amid US’s higher tariff on Indian goods, prompted a big sell-off. Elevated State Development Loans (SDLs) supply further worsened the situation leading to huge tail in primary auctions. Sentiments remained subdued despite the sovereign rating upgrade by S&P’s after 18 years. Corporate bond yields also inched up but to a lesser extent as the fresh supply remained muted amidst heightened volatility

Outlook

September month was a critical month for Fixed income market in many ways.

Amidst the volatile Global backdrop & fast evolving as US’s tariff policies, US’s FOMC kickstarted the rate cut cycle as it turns its focus on ensuring maximum employment even as the inflation remains out of its comfort zone. FOMC’s dot-plot has projected two more rate cuts in CY2025, and the market has also largely priced the same. While the US treasury yields may remain volatile on incoming data points and fiscal concerns, commencement of rate cut cycle provides comfort.

On the Domestic front, Market got relief on fiscal concerns as the GST Council assessed the fiscal impact of GST rate cuts to be ~Rs 48,000 cr, much lower than the market expectations of Rs 1.6-1.8 lac crore. Further, RBI announced the 2HFY26 G-Sec borrowing calendar which came out to be in line with budgeted number at Rs 6.77 lac cr, reassuring that the Central Govt would be able to contain its fiscal deficit, despite the revenue shortfall. Notably, the proportion of 30 year and longer tenor G-Sec has been reduced sharply to ~29.4% thereby addressing the demand-supply mismatch in the longer end. SDL calendar for 3QFY26 also came much lower at Rs 2.8 lac cr against the market expectations of ~Rs 3.2 lac cr and further adds comfort. With the fiscal clarity and lower supply, we believe demand – supply dynamics for G-Sec will remain favorable in 2HFY26.

Finally, MPC delivered a dovish pause in its October policy, after remaining hawkish in the previous two policies which had weighed heavily on market sentiments. Cleary the Governor appeared comfortable on inflation as RBI substantially revised its inflation projections downwards by 50 bps to 2.6% in FY26 and across all quarters, reflecting easing price pressures. Projections for Q2 and Q3 have been lowered to 1.8%, well below the RBI’s lower tolerance threshold of 2%. Q4FY26 inflation projection is at 4% which is aligned with RBI’s long-term target. A favorable monsoon and GST rate cuts will keep the inflation trajectory moderated. At the same time, Governor acknowledged the growth factors moderating in 2HFY26 led by US’s higher tariff, negative impact of which could be more that GST rate cut benefit. Against this backdrop of well contained inflation and below potential growth, we expect a 25bps policy rate cut in the December policy, especially if growth momentum weakens further or external risks intensify. During the press conference when asked about the rise in G-Sec yields, Governor acknowledged the upward movement and expressed confidence that market yields will moderate in response to policy rate cuts.

Market sentiment had turned negative after the June policy when RBI delivered a hawkish cut and further worsened by fiscal concerns. The benchmark 10 yr G-Sec yield had hardened by ~35-40 bps since the June policy and now with the fiscal reassurance and RBI’s dovish policy, we expect some reversal of yields. Current elevated yields and the running inflation at ~2% provides a favorable risk reward for investors. Having said that, as we come to the last leg of the rate cut cycle, it is important to re-align the return expectations from fixed income strategies as capital gain opportunities may be limited.

The corporate bond spreads in the 1 to 5 years segment are elevated, offering an attractive investment opportunity from accrual perspective. Additionally, the steepness in 5 to 10 years segment of the G-sec yield curve presents a value buy opportunity on the back of favorable demand– supply dynamics in second half of FY26.