Tariff worries? Allocate 40-50% to Sensex or Nifty basket: G Chokkalingam

The continued normal monsoon, falling inflation, and the S&P Global Ratings upgrade also contributed to the market recovery despite the US tariff threats, said Chokkalingam

Potential GST reforms could be a game changer for India’s middle class, says G Chokkalingam, founder of Equinomics Research. In a telephonic interview with Devanshu Singla, he explains how this stimulus, combined with macro tailwinds, is set to drive equity markets and shape investment opportunities. Edited excerpts:

How much of the recent market rally is driven by potential GST reforms compared to macro tailwinds?

 

GST reforms are one of the primary reasons for the market to recover. The Indian economy is not largely export driven. In FY2025, goods exports formed about 11 per cent of GDP, with US share being about 20 per cent in total goods exports. In this background, the GST reform has given confidence that the domestic economy's contribution to total GDP can increase further. Additionally, the continued normal monsoon, falling inflation, and the S&P Global Ratings upgrade contributed to the market recovery despite the US tariff threats. 

Can the GST reforms unlock pent-up demand for aspirational goods?

 

Certainly, yes. Consumer spending and aggregate demand will improve. Budget 2025 offered direct tax relief, and now Prime Minister Narendra Modi has proposed some concessions through indirect taxes as well. The two-way stimulus directly to the middle class - because the rationalisation of GST will include the basket of goods consumed largely by the middle class - is a really big game changer.

 

The stimulus may boost the housing loan sector by freeing up some middle-class savings. FMCG, durables, and two-wheelers are also likely to benefit.

At current valuations, which sectors offer favourable risk-reward, and which seem overbought or overlooked?

Amid US tariff uncertainty, I would suggest allocating 40 to 50 per cent to the Nifty or Sensex basket, as in times of market stress, domestic institutions are likely to continue buying these broad index stocks, which tend to be defensive in nature. Apart from that, public sector banks (PSBs) are worth considering. Despite short-term pressure on margins and asset quality, the medium to long-term outlook for banking is positive since interest rates are expected to reverse - this is inevitable. Over 6.3 per cent GDP growth will also have a positive effect and boost credit demand.

 

I emphasise on PSBs because when deposit and credit growth are subdued, there is pressure on net interest margins (NIM). Exposure to low-cost deposits, such as CASA deposits, is critical at this stage, and PSBs have been able to maintain CASA deposits well due to their extensive branch networks. Private banks, by contrast, are struggling to maintain CASA ratios.

 

Another sector to watch is real estate, particularly companies with substantial land banks. Rising land prices and expected continued reversal interest rate cycle in India could support the sector. The third is traditional two-wheeler manufacturers, as rural demand is likely to improve.

 

However, electric two-wheelers are not recommended, given the increasing competition and margin pressures.

What are your top picks from these sectors?

SBI and Bank of Maharashtra are good picks among PSBs. In the automobile sector, Mahindra & Mahindra (M&M) stands out as a unique player. Despite the various pressures in the passenger vehicle segment, M&M is outperforming its peers. A possible GST cut on tractors, if implemented, would also benefit the company. 

Given the present environment, what course of action would you recommend for investors?

Our research strategy is that investors shouldn't panic and rush to generate cash at this stage. Provided the US does not disrupt India’s IT service exports, the Indian markets look poised for gains. Corporate earnings are expected to pick up from the October–December quarter, driven by the GST reforms, a favourable monsoon and expected interest rate cuts. We also hope the US will reverse some of the reciprocal tariffs. Lower interest rates, a strong monsoon supporting the agriculture sector, and falling oil prices will benefit corporates, especially those reliant on crude oil or its derivatives for inputs. Oil is already down 20 per cent from a 52-week high and further significant fall would reduce forex outflow and boost aggregate demand.

 

Overall, unless disrupted by external factors such as US trade actions on our service exports, India’s economic growth story and stock market outlook should remain positive, particularly starting from the third quarter when the effects of GST reform, lower interest rate and cheap oil will be more pronounced.