Will GST reform, S&P Global upgrade bring FIIs back to Indian stock market?

The recent developments – proposed changes to the goods and services tax (GST) rates and S&P Global Ratings’ upgrade of India’s long-term sovereign credit rating to BBB from the lowest investment grade of BBB-, with a stable outlook, - may not be enough to bring back foreign investors back to Indian equity markets in a rush, feel analysts.

 

For a meaningful return to Indian shores, an improvement in corporate earnings along with a stable policy framework – both back home and globally (in the form of tariffs) – is a must, they suggest.

 

“Policy initiatives from the Government on the GST front with indications of next generation reforms have improved market sentiments significantly. However, the fundamentals (earnings growth) will take time to respond. A sustained market rally will happen only when we have indications of earnings revival,” said VK Vijayakumar, Chief Investment Strategist at Geojit Investments. 

 

Make smarter market moves with The Smart Investor. Daily insights on buzzing stocks and actionable information to guide your investment decisions delivered to your inbox.

Subscribe

 

Thus far in calendar year 2025 (CY25), foreign institutional investors have dumped Indian equities worth Rs 1.17 trillion, shows NSDL data, with January seeing the highest sell-off totaling nearly Rs 78,000 crore. In August, they had already sold stocks worth Rs 22,200 crore, according to NSDL.

 

Foreign investors, said Jitendra Gohil, chief investment strategist at Kotak Alternate Asset Managers, are looking to invest more in emerging markets (EMs) now as the artificial intelligence (AI)-led rally in the United States has made the related stocks overheated.    “India has been an underperformer due to a soft economic patch and corporate earnings. The second half of the fiscal 2025-26 (FY26) could see more policy initiatives by the government. Corporate earnings, too, are likely to pick up in the quarters ahead driven by the festival season and rate cuts by the Reserve Bank of India (RBI). The rating upgrade will be seen as a long-term positive by FIIs. The only surprise element amid all these positives is how the tariffs play out, which could keep investors at bay,” he said.

 

Corporate earnings

 

As regards corporate earnings, the Nifty, according to analysts at Motilal Oswal Financial Services (MOFSL), delivered an 8 per cent year-on-year (YoY) growth in profit after tax (PAT) versus their estimates of a 5 per cent uptick. 

 

“Bharti Airtel, Reliance Industries (RIL), State Bank of India (SBI), HDFC Bank, and ICICI Bank contributed 77 per cent of the incremental YoY accretion in earnings. Conversely, Coal India, Tata Motors, IndusInd Bank, ONGC, HCL Technologies, Kotak Mahindra Bank, Axis Bank, Eternal, Hindustan Unilever (HUL), and Nestle contributed adversely to the earnings,” MOFSL said.

 

Going ahead, Kotak Institutional Equities expects FY26 and FY27 net profit of the Nifty-50 Index to grow at 9.6 per cent and 17.5 per cent versus their estimates of 12.1 per cent and 15.4 per cent, respectively at the start of FY26. 

 

"Net income and earnings before interest, taxes, depreciation and amortization (EBITDA) of the Nifty-50 Index is likely to grow 9.6 per cent and 13 per cent in FY26 versus 6.5 per cent and 4.5 per cent in FY25," wrote Sanjeev Prasad, managing director and co-head of Kotak Institutional Equities (KIE) in a recent coauthored note with Anindya Bhowmik and Sunita Baldawa.

 

Buy the dip

 

That said, any tariff-related development that triggers a correction in Indian equities, analysts advise, should be used to buy from a long-term perspective.

 

“The 50 per cent tariff should not be seen as a reason to sell Indian equities. Rather it is probably a reason to buy them. It is only a matter of time before Trump backs off the stance (on tariffs on India). For investors, it is now too late to cut India exposure with valuations now back near the 10-year average,” said Christopher Wood, global head of equity strategy at Jefferies, in his recent note to investors, ‘GREED & fear’.