Has the GST reform-led stock market rally turned into a bull trap?

Data shows that over 50 per cent, or 255 stocks, from the Nifty 500 index had slipped below August 14 closing prices amid the over 3 per cent fall in Nifty 500 index from its recent high

The up move in the Indian stock markets that started after Prime Minister Narendra Modi announced plans to rejig the goods and services tax (GST) rates on August 15 has nearly fizzled out. This is despite the government coming through with what was promised.  The Nifty 50 and the Nifty 500 indices that registered their recent high on September 18 and September 19 respectively, have corrected 3.1 per cent and 3.6 per cent from their recent peaks and are barely around 0.1 per cent higher as compared to their August 14 close, ACE Equity data shows. 

Bull trap?

  The rally in select counters, especially in the mid-and small-caps post the GST 2.0 rejig announcement on August 14, technical analysts suggest, resembled a bull trap, where stocks after signalling bullish sign on the charts, suddenly took a U-turn and trapped investors unaware who had already bought these stocks at higher prices.   

 

  94 per cent of the counters that comprise the Nifty 500 index are trading lower than their respective recent high, data suggests. More importantly, over 50 per cent, or 255 stocks, from the Nifty 500 index down below August 14 closing prices.  ALSO READ | Difficult to make case for sustained underperformance: Saion Mukherjee  “Certain stocks in the mid- and small-cap segment may have seen a bull trap and could be vulnerable for further fall in case September 2025 (Q2-FY26) earnings disappoint. Large-caps, especially banks, seem to be relatively better placed,” said Ajit Mishra, senior technical analyst at senior vice-president for research at Religare Broking.  He expects the Nifty 50 to find support around 24,400 levels, which is also the 200-Day Exponential Moving Average (EMA), followed by the trend line support at 24,200 levels. 

Trade agreement

  At the fundamental level, markets, according to G Chokkalingam, founder and head of research at Equinomics Research, has already discounted the benefits of GST rate cuts and the enthusiasm has faded. He believes the markets are now more concerned about delay in bilateral trade agreement between the US and India.  "Market's next fear is possible moves by the US on tax on IT services imports into the US. September 2025 quarter (Q2FY25) corporate results also may not come back to double-digit growth. Hence, they may not give any strong support to the markets. It would be wise to focus exclusively on domestic demand-driven companies till the trade agreement is amicably signed with the US," he said.  As regards earnings, analysts at Motilal Oswal Financial Services believe that the worst of the (earnings) cuts are over, but remain mindful of the impact of the looming market risks. Lower-than-expected benefit of government actions on aggregate demand or any further high-impact geopolitical event, they said, could dent sentiment.  ALSO READ | Indian markets may underperform for the next 2 quarters: Jio BlackRock AMC  "The Nifty trades at 12-month forward PE (price earnings) of 20.6x (vs. LPA of 20.7x), which has potential to expand once the favorable effect of all policy measures shows up, which we believe should materialize in H2-FY26," they said in a recent note.  Despite the positive briefs coming on the US-India trade talks, market participants, according to Ambareesh Baliga, an independent market analyst, are getting skeptical.  "FIIs continue to sell, which is another sentiment dampener. Q2-FY26 earnings are not expected to be any better than Q1, with tariff imbroglio playing out. The GST benefits will be felt only in Q3, whereas Q2 may bear the brunt of GST adjustment in the supply chain," Baliga said.