Will the GST rate cut bring back foreign investors to Indian stock market?

The cut in goods and services tax (GST) rates effective September 22 has set the stage for the foreign institutional flows to return to India, believe analysts. However, they would still be mindful of US tariffs’ impact, valuations and the tepid corporate earnings growth back home before they return to Indian shores with animal spirits, they said.

This week’s recast was the biggest overhaul in the GST tax regime since its introduction in 2017 and saw an overall reduction in taxes across consumption categories. The changes rationalise the GST slabs from four to two – 5 per cent for essentials and 18 per cent on other goods – with a new 40 per cent tax on luxury and sin items.

The primary reason for the underperformance of the Indian market in the past year, according to analysts, is weak domestic growth. Earnings have grown by single digits for five straight quarters amid weak domestic demand. With these (GST rates) policies in place, analysts at HSBC for instance, expect growth to accelerate from the third quarter of fiscal 2025-26 (Q3-FY26) onwards.

“Consensus expects EPS to grow 14 per cent y-o-y in 2026, and in our view the policies supporting growth along with a favourable base have eased the risks of earnings downgrades and set the stage for foreign investors to return,” wrote Herald van der Linde, head of equity strategy for Asia Pacific at HSBC in a recent coauthored note with Yogesh Aggarwal and Prerna Garg.

Positive news flow

Foreign portfolio investors (FPIs), meanwhile, have sold stocks worth Rs 1.42 trillion thus far in calendar year 2025 (CY25), with their sales hitting Rs 12,257 crore in the first four trading days of September 2025, NSDL data shows.

A lot of triggers are slowly emerging for the Indian markets to attract foreign flows, said G Chokkalingam, founder and head of research at Equinomics Research, which could see trend (of FII outflow) reversing from the October 2025 quarter. GST rate cut, he said, combined with cut in direct taxes in Budget 2025, good monsoon and its impact on inflation, interest rates are key positives and have set the stage for FIIs to look at India.


“Corporate earnings should also pick up pace in this backdrop going ahead. The only concern is valuation (Nifty PE at 21x one-year forward) as compared to peers like China that will be on the minds of the FIIs. A rate cut by the US Fed in the months ahead, which is a strong possibility, will go a long way in bringing FII money to India,” Chokkalingam said.

On the earnings front, Pramod Gubbi, co-founder at Marcellus Investment Managers believes that the impact of GST rate cut to consumption boost remains to be seen, given that companies having passed on input cost deflation haven’t seen much demand response yet.

"At some stage, base effects and cyclical recovery as consumers pay down debt should help an earnings recovery, two-three quarters out. But for a sustained strong phase of earnings growth, we need many of these uncertainties that’s holding back animal spirits of the private sector to abate," he said.