Union Budget 2026-27 impact: Markets may be at an inflexion point

The market reaction to the Union Budget was negative. The main reason for an admittedly small selloff was the sharp hike in securities transaction tax (STT) on the derivatives segment, and to an extent, a negative reaction to tax being imposed on the purchase of Sovereign Gold Bonds (SGBs) from the market.

 

On the plus side, allocations to key infrastructure sectors and to defence relative to gross domestic product (GDP) were roughly maintained in 2026-27 (FY27). The focus on boosting manufacture in critical areas, along with the creation of rare earth corridors, could have long-term positive implications. Customs duty relaxations on key inputs could help the renewables sector. The biopharma drive could also be positive.

 

The STT hike may affect liquidity in futures & options (F&O) or derivatives segment. While it is designed to discourage retail traders from excessive activity, it will also hurt serious players, including foreign portfolio investors (FPIs) who use the F&O market to hedge positions. Loss of liquidity could translate into wider spreads. Given the tense geopolitical situation, and a recent selloff in global commodity markets, including both industrials and precious metals, this may increase hedging costs at a point where many serious players are looking to offset exposures.

 

The Nifty 50 index is up about 9.7 per cent in the last 12 months despite sustained selling from FPIs whose net sales add up to over ₹1.6 trillion over this period. This has also contributed to the rupee’s dip. The benchmark is down about 3.6 per cent in the last three months. Steady buying by mutual funds and other domestic institutions has prevented a bigger downtrend.

 

The Nifty is trading at a price-earnings (PE) multiple of 21.6x, which is close to the lowest valuations we have seen since the Covid lockdown. But the PE is fairly high in historic terms and higher than many peer emerging markets (EMs).

 

In technical terms, the index is trading below its own 200-day moving average (DMA) — around 25,200 — which is a bearish long-term signal. The index’s next key support level is at around 24,500-24,600. The movements on the Budget day briefly pulled the index above 200 DMA levels but it closed lower. Short-term indicators are bearish, too.

 

In terms of sector movements on the Budget day, most sectoral indices lost ground but the metals and PSU bank sectors were the worst affected, with both indices losing over 3 per cent each. The IT and telecom indices managed to buck the trend and registered small positive moves.

 

In terms of returns in the last 12 months, most segments are up. The metals index is one of the largest gainers of the last 12 months (despite the correction on the Budget day) with around 42 per cent gains while the PSU bank index is also up by about 44 per cent. The financial services sector overall is up 20 per cent, while financial service ex-banking is up 24 per cent. The oil & gas sector has also done well and the index is up 15 per cent. The worst performers of the last 12 months include the IT index and realty index.

 

The downtrend on the Budget session was quite broad, though value loss was marginal. It’s too early to say if the Budget has triggered a generally bearish phase, though, as mentioned above, trends across timeframes and sectors do indicate bearishness. If the 24,500 support is broken, the market could dip till around 23,750 before finding reliable support. On the upside, a close above 25,500 would signal a likely recovery, though there’s heavy resistance between 25,500 and 25,850 levels, where the index may range trade.