It’s not just humans who suffer from cognitive biases; markets do too. Interestingly, different financial markets exhibit distinct biases, each interpreting events through its own prism of prejudice. Take the recent announcements on GST reforms: equity markets have chosen to view them through the lens of growth, while bond and currency markets are focusing on potential macroeconomic risks—fiscal pressures and current account challenges. So, which lens captures the true pulse?Equity markets may be right in expecting GST reforms to revive consumption, which has remained lacklustre for a while. But the key question remains—will this revival come at the cost of broader macro stability?It is well known that consumption stocks have rallied since the GST rationalisation announcement. But what about bond markets? What signals are they sending since this rejig was announced from the ramparts of the Red Fort?The signs aren't encouraging. Bond prices have slumped and yields have surged since the announcement. A nearly 50-basis-point rise in yields from May’s lows is certainly alarming. Of course, the initial 10–15 bps rise was driven by the RBI’s hawkish stance in its early August monetary policy review. However, the bulk of the increase has come after the onset of tariff tensions and amid falling tax revenues.Tax collections, particularly on the direct-tax front—have been dismal this year. Net income tax collections have contracted 7.5% year-on-year as of August 11 (FY26), while corporate tax collections are up only 2.9%, well below budget targets. Against this backdrop, an additional fiscal slippage of 0.15–0.2% of GDP due to GST cuts has prompted bond markets to reprice yields.
Equity markets seem overly optimistic in expecting a CPI inflation dip from lower GST rates, leading to repo rate cuts by the RBI. But bond market behaviour tells a different story. With the base effect waning in the second half of FY26, especially in food inflation, and rising currency headwinds from tariff tensions, the RBI is unlikely to find room to cut rates. While a dovish turn from the RBI can’t be entirely ruled out, any such move might exacerbate risks for the Rupee, already under pressure.India’s currency is in a precarious position this year. The Rupee is one of only two emerging market (EM) currencies—alongside the Indonesian Rupiah—to have depreciated in 2025. Others have strengthened, riding the wave of a weaker US dollar. Most EM currencies have appreciated by high single digits, while the Rupee has fallen over 2% this calendar year.This hasn't gone unnoticed by equity markets. The spillover from bond and currency markets has impacted foreign institutional investors (FIIs) more than domestic investors, whose optimism remains largely intact. But FIIs are less forgiving when currencies send mixed signals. It’s no surprise they’ve been persistent sellers in recent weeks.While equities appear outwardly stable and range-bound, that masks a deeper underperformance. The Nifty, for example, is one of only two EM indices (alongside Brazil’s Bovespa) to fall over 2.5% this quarter.
Others—led by China and Indonesia—have delivered double-digit returns. This marks the first time since the COVID era that India has underperformed most major EM peers. If FII selling continues, this underperformance is unlikely to reverse.India has attracted global investors on the back of strong macro fundamentals, despite a sluggish earnings cycle. These include stable twin deficits, robust forex reserves, a resilient currency, and favourable inflation-interest rate dynamics. Any threat to this macro stability could lead to a re-rating of India in the eyes of global investors.The ongoing tariff tensions with the US may not immediately hit GDP growth, but they pose risks to India’s macro credibility, which has been carefully built under the current administration. One must tread carefully when playing against Uncle Sam—especially when we don’t hold as many strategic levers as our tough neighbour, China.
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