The latest rationalization of GST rates warrants a rejig in investors’ portfolios. Experts have become bullish on consumption stocks, such as FMCG, consumer durables, internet, and hotels, and have even turned overweight on real estate.
However, sentiments around infrastructure and defence have weakened due to expectations of short term revenue losses. JM Financial has also turned underweight on banks, NBFCs and insurance.
GST Council 56th Meeting:
The Finance Minister Nirmala Sitharaman has chaired the 56th meeting of the GST Council, in New Delhi, on September 3rd.
The market is expecting a reduction in GST slabs — from 5%, 12%, 18% and 28% – with a two-slab structure of 5% and 18%. Additionally, the 40% special rate for sin and demerit goods is expected to be introduced.
This is likely to give a significant boost to consumption. However, analysts predict that over the short terms this could lead to consumers holding off purchases till the proposed GST cuts lead to lower prices.
Income Tax Cut In the Union Budget 2025:
The latest GST rates cut would be an added bonus to the income tax rate reforms announced under the new regime during Union Budget 2025.
In the FY26 Budget, Sitharaman said, income up to Rs 12 lakh will be tax-free under the new tax regime. Also, the standard deduction of Rs 75,000 leads to an income tax exemption for salaried employees with an income of Rs 12.75 lakh.
Also, the existing new tax regime, where income above Rs 15 Lakh was taxed at the highest rate of 30%, has been increased to Rs 24 lakh.
This move led to savings up to Rs 60,000 for salaried employees earning up to Rs 12 lakh, while the savings were higher at Rs 110,000 for income up to Rs 25 lakh.
Policy Repo Rate:
And then there is the 100 basis points cut in repo rate to 5.50%, which has been a big boost for banks and lending rates in general. As per JM’s note, the transmission of rates has been meaningful, as the lending rates have declined by 71bps while deposit rates have moderated by 87bps.
Also, liquidity in the system has improved significantly due to the steps taken by the RBI.
Here are the expectations of JM Financial and recommendations to rejig portfolios due to GST rates cut:
1. Consumption Stocks:
The current scenario in India is favourable for consumption stocks, due to the government and RBI’s collective move to lower income tax rates, interest rates, and a key focus on maintaining the liquidity system. The proposed GST rate reduction is another bonus.
This is why, JM has turned bullish on consumption in its model portfolio: (1) autos moves to overweight (neutral earlier), (2) consumer moves to overweight (underweight earlier), (3) cement moves to overweight (underweight earlier), (4) internet moves to overweight (underweight earlier), and (5) overweight on hotels and real estate.
2. Infrastructure, Defence Stocks:
However, for infrastructure and defence, investors are recommended to take a step back. This is because JM predicts that GST rate cut could lead to revenue loss over the short term.
It said, “Lower revenue could constrain fiscal space, potentially impacting the pace of infra and defence capex. On the back of this, we turn (1) underweight on infrastructure, industrials, ports and defence (overweight earlier) and (2) remain underweight on power utilities.”
3. BSFI, Oil & Gas, Insurance, IT services Stocks:
“Since inception (13th May ’25) our model portfolio has underperformed the Nifty50, returning -1.2%, vs. Nifty50 at -0.6%. This underperformance was driven by weakness in overweight sectors like banks, NBFC, and oil & gas, and our neutral stance on IT Services,” JM’s note.
Furthermore, it added that the disbursement growth is like to be weak in FY26 as well. Against prospects of 12% for FY26 at the beginning of the year, credit growth trended at 10% YoY till July. Asset quality pain in retail unsecured segments (MFI, PL and CC) is increasingly expanding to MSME loans. At the same time, with demand pushed out by expectation of GST cuts and US tariffs impacting export-oriented MSMEs, capex pickup is also expected to get postponed.
Hence, while being underweight on banks, NBFCs and insurance stocks, JM said, “we expect loan growth to remain range-bound at 10% levels in the near term, which, coupled with elevated credit costs, drives our pessimism towards the sector.”