Budget hopes fade as Modi 3.0 market gains erased, Nifty back to June lows

After gaining as much as 12%, Nifty is back to levels seen before PM Modi's third swearing-in

The equity markets are approaching the Union Budget with tempered expectations, even as gains made during Prime Minister Narendra Modi's third tenure have been erased. The benchmark Sensex and Nifty indices have retreated to levels last seen before Modi’s swearing-in on June 9, after rising as much as 12 per cent.

 

Most market participants remain sceptical about the upcoming 2025-2026 Budget, citing limited fiscal headroom for economic stimulus. Kunal Vora, director and head of India equity research at BNP Paribas, stated: “The government does not have much headroom to stimulate the economy right now due to slowed GST collections and corporation tax collections.”

 

Some analysts believe the Union government may have to forgo the fiscal consolidation path and avoid populist measures to spur growth. “We expect the central government to prioritise macroeconomic stability by adhering to fiscal consolidation and steering clear of populist measures. This will help keep additional spending and incremental inflationary impact in check. Instead, moves may focus on fine-tuning existing measures and boosting medium-term demand,” said Radhika Rao, senior economist, DBS Group. 

 

Over the years, the correlation between market performance and the Budget has weakened. However, Ridham Desai, equity Strategist at Morgan Stanley, observed that this time around “the market seems to be approaching the Budget with scepticism”. He highlighted key areas to watch: The extent of fiscal consolidation, the delta in spending on physical and social infrastructure, and sector-level incentives.

 

“The key questions facing fiscal policymakers in the upcoming Union Budget are likely to be around the speed of fiscal consolidation and the spending priorities of the government,” said Santanu Sengupta, chief economist- India at Goldman Sachs, in a note.

 

From its all-time closing high of 26,216 on September 26, the Nifty 50 has dropped 11.7 per cent to 23,155 — a level last seen on June 7 — while the 30-share Sensex is down 11 per cent from 85,836 to 76,405.

 

Several sectoral indices, such as realty, energy, and media, have plunged over 23 per cent each from their record highs. Currently, only the information technology (IT) and pharmaceutical sectors have performed well during Modi 3.0. The Nifty IT index is up 21 per cent, and the Nifty Pharma index has gained nearly 13 per cent, driven by optimism around the US economy — a key market for both tech and health-care companies.

 

The sharp market decline stems from a confluence of domestic and global factors. Domestically, a slowdown in economic and corporate earnings growth has made India’s premium valuations appear unsustainable. Globally, rising US bond yields and a strengthening US dollar have triggered a sharp reversal in foreign portfolio investor (FPI) flows.