Sensex, Nifty outlook: How to navigate tariff, rupee, and geopolitical headwinds to stay invested

India’s stock markets, much like their global peers, have weathered considerable turbulence over the past year. The Nifty50 and Sensex were down by 2.77% and 2.91%, respectively, year-on-year (YoY) as of September 2. Hence, parking money in stock markets becomes a tricky business for investors during such volatile times. 

According to experts, markets are currently in a consolidation phase after the post-Covid surge. "One of the main reasons for this consolidation is the constantly changing narrative in India. If you examine the market on a YoY basis, it may appear underperforming. But in reality, markets are rangebound—making lower tops and lower bottoms," says Kranthi Bathini, equity strategist at WealthMills Securities Pvt. Ltd. 

A volatile period

The markets have been volatile, courtesy of rapidly changing geopolitical dynamics, coupled with U.S. President Donald Trump’s tariff imposition. Investor caution heightened, and foreign outflows, which have totalled over $13 billion this year, remained elevated as the U.S. imposed 50% tariffs on a broad set of Indian exports by late August. “Only a year ago, China was seen as an enemy, but today the narrative has shifted—we are talking about complementing China and working with them. These shifting narratives also contribute to the range-bound market. On top of that, consistent FPI (foreign portfolio investor) selling is another reason for the consolidation,” says Bathini.

The Trump tariffs have significantly dampened investor sentiment in Indian markets, leading to notable near-term volatility. “This will lead to earnings forecast cuts and margin compression for companies heavily reliant on exporting to the U.S. markets," explains Devarsh Vakil, head of prime research, HDFC Securities.

A depreciating rupee, India's higher relative valuation compared to emerging market peers, and subdued corporate growth suggest that the current trend is unlikely to reverse significantly in the short term. "However, at lower market levels, when valuations improve and in anticipation of stronger growth in the second half of the year, we expect FPIs to return to Indian markets," Vakil adds. Meanwhile, the CME FedWatch tool suggested a 90% probability of a 25-bps rate cut by the U.S. Federal Reserve in mid-September, which could ease pressure on emerging markets, including India.

The GST factor

Amid the macro headwinds, the government is betting that the proposed GST recalibration will counterbalance stress and inject stimulus. "Expected GST rationalisation and rate cuts from the U.S. Fed, along with India’s GDP clocking in at 7.8% in Q1FY26, do act as strong tailwinds for the markets,” says Vaqarjaved Khan, CFA, senior fundamental analyst, Angel One Ltd.

Aparna Shanker, CIO–equity, The Wealth Company AMC, echoes similar views. "The growth outlook remains largely intact with real GDP growing at 7.8% in Q1FY26, with Nifty 100 companies reporting a 9.8% YoY growth in profitability. With valuations being largely reasonable and sustained domestic growth prospects, we see a stable market with returns being largely in line with historical expectations (as uncertainties from tariffs and FII outflows are offset by improving domestic consumption and capex),” she explains.

According to Axis Securities, India’s long-term fundamentals remain strong, driven by “robust domestic growth, government spending on infrastructure, resilient corporate earnings, and financialisation of savings”. Even as the outlook for Indian equities stays positive in the medium to long term, volatility will continue in the near term due to “global uncertainties, GST collections, monsoon trends, and US trade cues”, it states.

Moreover, industry bodies such as the Confederation of Indian Industry affirm that GST cuts, alongside broader reforms, could offset the harm caused by high U.S. tariffs. Yet, not all are optimistic. Technical analysts warn of continued selling pressure unless the Nifty sustains levels above 24,850, cautioning against complacency amid historical patterns of weakness in September.

Key catalysts to watch for

Investors are awaiting the final verdict from the GST Council meeting on rate recalibration scheduled for September 3 and 4. A GST cut from 28% to 18% on items, including consumer electronics and hybrid vehicles, could boost demand and spending, ultimately improving earnings. 

Investors also look at corporate earnings. Recovery hinges on a rebound in topline growth and margins. Without earnings improvement, valuations may stay stretched despite macro reforms.

Technical market dynamics indicate a short-term range of 24,500–24,850 for the Nifty. Analysts say that any breakout in the range could lead to renewed rallies, while reversals might cause consolidation or further losses.

While domestic improvements can boost sentiment, it is important to recognise that global conditions should also improve. The Fed’s rate decisions, inflation data, and wider global stability are expected to support ongoing market growth.

Furthermore, if conditions remain favourable, investors could observe a reversal of FII flows. Analysts suggest that a stable global environment or a dovish U.S. policy might reduce outflows or attract new inflows.

What should investors do?

The Systematic Investment Plan (SIP) inflow of more than ₹28,000 crore into mutual funds in July 2025, according to the latest figures by the Association of Mutual Funds in India, suggests that investors have maintained a disciplined approach in a volatile market. Investors should continue with the same approach, experts say, maintaining SIPs while taking advantage of meaningful corrections to top off their exposure to equities.

"For investors, Indian markets continue to remain a ‘buy on dips’ opportunity. However, it is crucial to focus on the right entry level, the sector being chosen, and the price being paid. The margin of safety should be paramount in this kind of market,” says Bathini.

With the favourable monetary and fiscal policy environment, inflation at a multi-year low (the lowest in six years), robust GST collections, renewed government spending momentum, and strength in corporate balance sheets, analysts remain positive on the India story. "If someone has ₹2 lakh to invest, one should look for an SIP over a lump sum investment and invest in a staggered manner. Investors with a long-term investment horizon can do SIPs in Nifty500 ETFs along with some mid-cap and small-cap funds for additional alpha," says Khan.

Additionally, Shankar says, "A retail investor with ₹2 lakh should deploy funds in a manner depending on their time horizon, risk tolerance, and financial goals. A good mix of SIPs in flexicap/multicap MF schemes, with some investment in gold and liquid funds, would help investors seek a balance between returns and volatility."

However, the Axis Securities report recommends focussing on large-cap and quality mid-cap stocks that can deliver sustainable growth. Axis Securities’ Top Picks portfolio (for September 2025) includes a basket of 12 stocks across financials, autos, IT, and infra, suggesting a diversified approach. It also emphasises systematic investments and staggered buying in the current volatile market.