Equities, rupee sparkle on 'double Diwali' promise; bonds flicker

10-yr bond yield sees sharpest rise in nearly two years as GST rejig plan stokes fiscal fears

Investor sentiment received a strong lift on Monday as Prime Minister Narendra Modi’s promise of sweeping reforms to goods and services tax (GST), combined with the country’s first sovereign credit upgrade in nearly two decades, sent equities higher and strengthened the rupee. Bond markets, however, turned skittish and the yield on the benchmark 10-year government security jumped 10 basis points — the steepest single-day rise since October 2023 — as the expected reduction in GST rate slabs revived fiscal concerns, and stoked fears of increased debt supply.

 

The Sensex surged 1,168 points at one stage before closing 676 points, or 0.8 per cent, higher at 81,274. The Nifty 50 added 246 points, or 1 per cent, to settle at 24,877. Both indices recorded their best single-session performance since June 26 on a closing basis, and the sharpest intraday rise since May 15. The market capitalisation of BSE-listed firms rose by ₹6 trillion to a record ₹451 trillion.

 

 

The cheer was fuelled by the Centre’s proposal to ease the complex GST system into two slabs of 5 per cent and 18 per cent, with a 40 per cent bracket reserved for sin goods. In his Independence Day speech, the prime minister had promised “a double Diwali”. 

 

“We are bringing next-generation GST reforms. This will reduce the tax burden across the country,” the PM  had said. 

 

The changes, alongside earlier income tax cuts, are pitched as a cushion against weak consumption and the bite of 50 per cent US trade tariffs. S&P Global’s decision to raise India’s long-term sovereign rating for the first time in 18 years (from BBB- to BBB), while simultaneously upgrading 10 financial institutions, added heft to the rally and spurred buying across banks and consumer-facing stocks.

 

“Domestic equities witnessed a strong rebound following the PM’s announcement of second-generation GST reforms... This triggered broad-based buying. The market sentiment was further buoyed by S&P’s upgrade of India’s sovereign credit rating,” said Siddhartha Khemka, head of research (wealth management), Motilal Oswal Financial Services.

 

Maruti Suzuki India leapt 8.9 per cent on hopes that small cars would see their GST reduced from 28 per cent to 18 per cent. Bajaj Finance climbed 5.02 per cent and Mahindra & Mahindra rose 3.5 per cent. Among sectoral indices, Nifty Auto and Consumer Durables led the rally with gains of 4.2 per cent and 3.4 per cent. Market breadth was healthy, with 2,562 stocks advancing against 1,627 declines. Only IT and pharma indices missed out.

 

Government bonds were, however, unsettled. The yield on the 10-year government security climbed to 6.50 per cent as traders fretted over the fiscal math behind the tax rejig. With the GST move estimated to shave off ₹1.8 trillion, or 0.5 per cent of GDP, from government revenues over 12 months, dealers braced for the prospect of heavier borrowing. “There is fear of an increase in supply of bonds, and uncertainty in the market,” said a trader at a state-owned bank.

 

S&P’s upgrade, which had briefly boosted bonds before markets shut for Independence Day, could not offset the sell-off this time. IDFC First Bank, in a report, warned that while the Centre would bear only 0.15 per cent of GDP in revenue loss compared with 0.36 per cent for states, investors were still wary of supply pressures. The GST Council is expected to take up the proposals in September or October.

 

In the currency market, the rupee got stronger by 21 paise to close at 87.35 per dollar, tracking the equity rally and hopes that the GST cuts could arrive in time for the festival season. “The rupee gained supported by expectations of a GST reduction likely to be announced around Diwali, with GST Council and PMO meetings lined up to provide a fiscal boost,” said Jateen Trivedi of LKP Securities. He sees the currency trading in a band of 87.00–87.75.

 

The domestic unit has shed 2.15 per cent so far this financial year against the greenback, and 1.99 per cent in the calendar year, but has managed a 0.24 per cent uptick in August.

 

Looking ahead, traders say domestic cheer could be tempered by global currents. Ajit Mishra of Religare Broking warned that unresolved trade tensions with the US and uncertainty over Ukraine peace talks involving Russia could keep markets edgy. “With the Nifty 50 reclaiming its short-term 20-day moving average around 24,750, sustaining above this level will be crucial for a move toward 25,250,” he said.