Sensex's worst 1-month pre-Budget run since 2016 signals weak optimism

Market watchers expect capital market reforms to reverse FPI flows

Investor expectations from the upcoming Union Budget appear subdued, as reflected in weak pre-Budget market performance. The benchmark Sensex is down nearly 4 per cent in January so far — its worst one-month return ahead of the Budget since 2016, according to data compiled by Business Standard.

 

Muted corporate earnings, heavy foreign outflows, and elevated global uncertainty have weighed down markets.

 

The broader market has seen even sharper declines. The Nifty Midcap 100 is down 5.4 per cent, while the Nifty Smallcap 100 has fallen over 7.3 per cent so far this month. This mirrors last year’s trend, when the two indices corrected 7 per cent and 10 per cent, respectively, in the month preceding the Budget. 

The Union Budget comes against a backdrop of heightened geopolitical uncertainty, including lingering trade tensions and India’s failure so far to clinch a trade deal with the US. Investors have also remained cautious amid expectations of limited policy surprises. 

Weak corporate earnings and sustained selling by foreign portfolio investors (FPIs) are being cited as the key drags on market sentiment. Early disclosures for the third quarter (October–December/Q3) of 2025–26 have reinforced concerns about profitability.

 

Ridham Desai, managing director and chief India equity strategist at Morgan Stanley, said the impact of the Budget on markets has been on a “secular decline”, though actual market performance depends on pre-Budget expectations, as reflected in market moves ahead of the event.

 

“As of now, the market appears to be approaching the Budget with scepticism and could be dealing with both volatility and upside risk post-Budget, if history is a guide. For the market, the key things to watch are the extent of fiscal consolidation, capital expenditure, and sector-level actions. Of particular interest will be capital-market reforms to encourage a revival in foreign portfolio flows,” he said in a note.

 

The note added that investors will be closely watching capital-market reforms aimed at reviving foreign portfolio inflows.

 

FPIs have sold Indian equities worth ₹36,811 crore in January so far, the highest monthly outflow since January 2025.

 

“It is quite possible that the Budget proposes measures such as broadening the FPI base to allow more pools of capital to access Indian equities, simplifying buyback taxation — which currently threatens to distort capital structures — and further enhancing tax benefits at GIFT City (Gujarat International Finance Tec-City),” Desai said.

 

Market participants said low expectations ahead of the Budget mean even modest positive policy signals could trigger a relief rally.

 

Samir Arora, founder and fund manager at Helios Capital, said prolonged weakness in equity markets slows the entire investment cycle, leading to the loss of valuable time in meeting the government’s investment and economic growth targets. In a social media post, he called for a “substantial” reduction in both long-term capital gains and short-term capital gains taxes for all investors — not just FPIs — arguing that minor tax tweaks for a narrow group are unlikely to materially improve market sentiment.

 

In a separate note, Goldman Sachs said key issues to watch in the upcoming Budget include the pace of further fiscal consolidation, the government’s spending priorities in a more uncertain global environment, and the net supply of government securities.

 

Indian equities have remained volatile since September 2024 amid concerns over earnings growth and global trade tariffs. Recent government measures, such as higher direct tax thresholds and goods and services tax rationalisation, have so far had only a limited impact in arresting the market’s decline.