GST cut a partial cushion against trade headwinds

Markets cheered the cut in goods and services tax (GST) rates last week. Mahesh Nandurkar, managing director at Jefferies, tells Puneet Wadhwa in an email interview that for foreign institutional investor (FII) money to return to India, either valuations must moderate or growth expectations need to improve. Edited excerpts:

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Is the GST rate cut enough to cushion the impact of US tariffs?

■ GST rate cuts are definitely positive for consumption, especially with the festival season approaching. The advantage is that these cuts are being implemented with limited fiscal impact, thanks to the conversion of GST cess into GST. They are also supportive of the inflation outlook, increasing the probability of rate cuts. While India's exports to the US are affected by tariffs of about $50 billion, the GST benefit is estimated at $15-20 billion, providing a partial, though not full, cushion against trade headwinds.

Are policy initiatives enough to bring FII money back to Indian markets?

■ Given that the Consumer Price Index inflation outlook over the next 12 months is around 4 per cent—and with the recent GST cuts improving the outlook—there is room for the Reserve Bank of India to cut rates by 25-50 basis points. For FII money to return, either valuations need to moderate or growth expectations must improve.