Hong Kong headquartered brokerage CLSA said the reduction in auto fuel taxes will impact central government's revenues by 16 bps of the GDP on an annualised basis and it highlights the government’s political compulsions.

This revenue reduction, in addition to uncertainties on GST collections, which appear to be running short at the moment, raises fiscal concerns, the brokerage said.

"Concern on government revenues is likely to build-up. Lower revenues may not necessarily pass the market’s test of a government ‘stimulus’. This could keep FPI sentiment on India weak in the near term," said CLSA.

The brokerage said that FPI sentiment on Indian equities, which has been weak for some time, will likely remain that way until corporate earnings recovery sets in.

The brokerage expects this to happen partially in the September quarter but more so in the December quarter.

"Weak FPI sentiment coupled with higher equity supply implies that market performance may remain subdued until the year-end," said CLSA.

However, the brokerage's long-term optimism on a housing-led recovery remains intact. Therefore, CLSA has replaced State Bank of India with HDFC Bank in its model portfolio.