Budget pitches for macro stability and growth resilience in an uncertain global environment

The Budget’s direct and immediate impact on the Indian equity markets should be negligible. Fundamentally, any path of fiscal consolidation, as this Budget follows, is inherently not going to drive growth directly in any economy in the immediate term.

However, some of the Budget’s expenditure and tax proposals do enable growth momentum, whether acceleration or deceleration, for the relevant sectors. In the right mix, though, these policies — for instance, more capex vs revenue spending — do help drive an overall macro growth trajectory over the medium term. This Budget has continued on the path of resilience, with a focus on enabling a higher future growth trajectory through capex, simplification, and supporting key sectors like manufacturing and technology.

Union Budget 2026 LIVE

Therefore, the markets should take confidence that the Budget supports the medium-term growth trajectory, though near-term moves may be affected by sentiment or pre-Budget expectations.

Global uncertainty

Investors should reflect on the backdrop against which this year’s Budget was announced. Heightened global economic and geopolitical uncertainty meant limited leeway to take any material risks around fiscal assumptions or even growth-supporting fiscal expansion.

The assumptions around the fiscal maths are on the credible side. While some may find RBI dividends and disinvestment numbers to be on the aggressive side, the tax revenue assumptions don’t seem to be building in any pickup in buoyancy. This is despite the tax cuts, simplification measures announced in the Budget, and also some measures meant to boost taxpayers’ confidence. The net borrowings figures were also in line and should not alter local interest rates in any material way for now.

Union Budget 2026-27 documents

Capex in key public sectors

Capex spending had taken a back seat last couple of years, after three or four years of strong growth, possibly reflecting socio-political considerations. This Budget brings the focus back to capex and that augurs well for the medium-term growth trajectory. Key capex areas where the Union government plays a big role have seen a pickup in outlay, especially after the lackluster trends seen over the last two years. These include the Railways, defense and, to some extent, power and roads. This overall approach is a positive though the scale of spending pickup is marginal.

Incentives and schemes supporting data centres, IT services, specific services such as healthcare and tourism, and manufacturing, especially electronics and semiconductors, are positive measures. They will not only aid these sectors directly, but also the broader economy as they have a multiplier impact through either job creation, capital formation, increased exports, or import substitution. Investors should also look at these sectoral measures in the context of the recent free trade agreements, especially the one with the EU. Connecting the dots through an optimistic lens, the policy push to boost these sectors augurs well.

Impact on derivatives

Increased taxes on derivatives in the equity markets will likely have some adverse impact on trading volumes for the derivatives segment. However, if one of the policy objectives was to curtail retail participation in the segment, the impact may be quite limited. There may also be some impact on cash market volumes if futures trading volumes are materially affected. These measures may weigh a tad on specific stocks linked to equity market trading activity but should not affect the Indian market’s overall trajectory.

The Budget amended buyback taxation norms to bring them in line with the capital gains tax or the dividend distribution tax for corporates. Rising buybacks are good for the capital efficiency for the economy, markets, and investors.

Expectations hit short-term sentiment

Expectations become hopes and sometimes run ahead of reality, leading to short-term sentiment issues. The immediate market reaction during the speech reflected that expectations for a cut in capital gains tax, broadly or specifically for some category of foreign portfolio investors (FPIs), may have been more entrenched. FPI outflows have been weighing on Indian market performance, worrying local market participants despite the strong local inflows into mutual funds.

The market should get past such concerns in a day or two. However, India’s underperformance versus other emerging markets may continue for some more time. The construct of rich valuations, without strong earnings growth (absolute growth, as well as in comparison to other market, or even versus history), and the capital raising pipeline (both primary and secondary), suggest a rangebound market for the near term.

However, long-term investors should take this Budget and other recent policies such as the FTAs and labour reforms, as supportive of medium-term economic and earnings growth.

Published – February 01, 2026 05:39 pm IST