Why tax relief hasn't spurred a strong rally yet

Investors are betting on India's consumption revival, focusing on the consumer discretionary sector

- Abhinaba Saha

Can tax relief for the urban middle class spark a consumption revival, and help accelerate an economy that has been grappling with a slowdown? The government sure hopes so.

In the Union budget presented on 1 February, finance minister Nirmala Sitharaman announced raising the income tax exemption limit to ₹12 lakh from ₹7 lakh, which has been touted by many as a potential game-changer. While analysts foresee a boost in demand for consumer discretionary goods and durables, the real question is whether this will translate into a sustained rally in the broader market. For now, the champagne remains on ice.

Despite initial enthusiasm, experts urge caution, citing high valuations in most sectors. According to a recent report by Motilal Oswal Financial Services, nearly 66% of sectors are still trading at a premium to historical averages, despite heavy corrections over the last four months. This, they argue, will limit the potential for a broad-based market rally, even if consumption revives.

Neeraj Chadawar, head of fundamental and quantitative research at Axis Securities, said the focus remains on quality and growth at a reasonable price. "Domestic macroeconomic risks persist, while we are taking cues from the US market on a daily basis," Chadawar said. "At least for one quarter it is recommended to remain invested in high-quality growth stocks which are available at reasonable prices."