Budget 2026: What stock markets expect from FY27 Union Budget

Budget 2026 stock market expectations: Analysts see focus on fiscal discipline, capex push, defence, and infrastructure amid limited reform surprises

Budget 2026 stock market expectations

 

Indian stock markets are discounting "no major reforms" in the Union Budget 2026, which is set to be presented on Sunday, February 1, 2026.

 

According to analysts, markets expect the Union Budget, for financial year 2026-27, to focus on “fiscal discipline” rather than populist measures as the government has already introduced direct tax code changes (via last year’s Budget, effective this year), and indirect tax changes via GST rationalisation (effective September 2025).

 

They, however, see "scope for an increase in capital expenditure (capex) in non-traditional or sunrise sectors", including defence and allied sectors.  "Since tax revenue growth is moderate, Finance Minister Nirmala Sitharaman may opt to mobilise additional revenue through disinvestment. That apart, Budget 2026 will likely on boosting the performance of sectors like defence, railways, and MSME. The Budget will stick to the fiscal consolidation path by targeting fiscal deficit of around 4.2 per cent of GDP," V K Vijayakumar, chief investment strategist at Geojit Investments Limited.

 

 

What stock markets expect from Budget 2026

Nomura

Nomura believes macro stability will continue to be the priority, with measures focused on reforms, instead of relying on fiscal profligacy. Potential focus areas, it said, could include expanding the production-linked incentive scheme, support for MSMEs and exporters, regulatory reforms, accelerated depreciation for targetted sectors, larger capital outlays for defence, a further push on critical minerals supply chain resilience, and rationalising customs duty slabs.

 

On the economic front, the Japan-based brokerage expects Centre to target debt levels in FY27 Budget, rather than fiscal deficit. It expects the debt target in FY27 to be set at ~55 per cent of gross domestic product (GDP), down from 56 per cent in FY26, which should be consistent with a fiscal deficit of 4.2 per cent of GDP. The brokerage expects capex to be maintained at 3.2 per cent of GDP.

 

Further, Nomura expects gross borrowing of around ₹17.5 trillion for FY27, higher than ₹14.8 trillion in FY26. Net market loans are likely to be ~₹12 trillion, up from ₹10.9 trillion (adjusted for payments from GST fund) in FY26. 

Morgan Stanley

Global brokerage Morgan Stanley expects Budget 2026 to focus on capex and social infrastructure. It expects Centre to increase defence sector capex by 12-15 per cent, while core infrastructure capex could grow 8-10 per cent.

 

"Markets will watch the extent of fiscal consolidation, capex, and sector-level actions in Union Budget FY27. Of particular interest will be capital market reforms to encourage a revival in foreign portfolio flows. We are overweight on financials, consumer discretionary, and industrials," it said.

 

On the economic front, Morgan Stanley expects the government to peg fiscal deficit at 4.2 per cent of gross domestic product (GDP) in FY27, compared to a target of 4.4 per cent of GDP set in FY26.

 

"This will likely be the shallowest pace of consolidation since FY23," it said.

 

Bank of America (BofA) Securities

As per BofA Securities, the Ministry of Finance is on track to hit its medium-term fiscal deficit target of below 4.5 per cent of GDP it had set in 2021, and is going to pivot to a debt sustainability framework from FY27. The Government, it said, could target 55 per cent of central debt to GDP in this Budget, down from an estimated 56.1 per cent of debt in FY26.

 

"This would make the fiscal position less contractionary, but maintain fiscal sustainability, ensuring spending rises broadly in sync with the nominal growth cycle, and not a drag on economic activity," it said.

 

On the revenue front, BofA Securities sees scope for revenue growth to rise by 10.7 per cent year-on-year (Y-o-Y), aided by reasonable growth in direct taxes, mild recovery in GST and higher provisions for dividends (estimated RBI dividend to be ~₹2.9 trillion) and divestment inflows. With this, it sees the overall revenue to GDP ratio rising to 9.6 per cent, modestly up from 9.5 per cent in FY26.

 

As for capex, BofA pegs FY27 capex target at ₹12.5 trillion – 3.2 per cent of the GDP – with considerable focus on a few strategic areas such as Defence, Railways (safety, signaling, and rolling stock), and Shipbuilding. Allocation could continue to remain subdued for Roads, Railways (remaining sub-segments), and Housing.

 

"Over the past 12-18 months, we have seen a clear pivot by the government/RBI towards reviving consumption. Any potential stimulus or incremental benefit (including rural focused schemes) would be seen as another positive for consumer staples and discretionary companies. Besides, after the recent sharp hike in cigarettes taxation, any clarity on National Calamity Contingent Duty (NCCD) or other cesses could be a swing factor," it said.

 

BofA added: Auto sector is unlikely to see any big announcement; Healthcare sector would watch out for reduction in custom duties for high-end medical equipment imports, and support for innovation in the form of restoration of weighted R&D deduction; OMCs may see pressure due to a hike in auto-fuel excise duties.

 

"The government is likely to revamp the custom duty slabs and tariff structure in the upcoming budget. With the aim to reduce litigation and better align import duties with the industry and trade priorities, the Centre may lower import duties on critical inputs for semiconductors, EV batteries and renewable energy equipment. We also expect the government to raise fuel excise taxes modestly to boost their revenues, but may choose not to raise pump prices," it said.

 

That apart, BofA also expects the Government to raise FY27 divestment targets, doubling from ₹40,000 crore to ₹80,000 crore, largely reflecting greater reliance on non-tax and non-debt capital receipts.

 

Moreover, BofA expects the Reserve Bank of India (RBI) to announce another high dividend transfer for FY27 in May, given its ongoing increase in investment returns, as well as gains from foreign exchange intervention.

 

It expects a return of ₹2.9 trillion for FY26 for RBI, which will be paid out to the government of India in May 2026, providing a massive boost to non-tax revenues, along with other dividend and non-tax revenue payouts in FY27.

 

ICICI Securities

According to ICICI Securities, the Union Budget for FY27 could limit spending, focus on developmental areas (manufacturing and infrastructure), and reduce ‘debt to GDP’ ratio ahead of expectations, thereby boosting private credit growth.

 

It expects Budget allocations via PLI (production linked incentives) and other central schemes to focus on local manufacturing activities in critical or high value-added areas such as automobiles, space, energy, defence, semiconductors, R&D, pharma, chemicals, and electronics.

 

PLI scheme for electronics, in particular, could either see an extension or a new avatar given its success since its inception in 2000.

 

Labour-intensive manufacturing activities such as textiles and jewellery, impacted by US tariffs, could witness continued support, it said.

 

As regards government borrowings, ICICI Securities noted that bond yields have stayed elevated (currently at 6.6 per cent) as market participants anticipate higher supply of bond issuances, especially by states going ahead (borrowing programme of ~₹5 trillion in Q4FY26 by states).

 

"Thus, any positive surprise in terms of reducing the 'debt/GDP' and fiscal deficit/GDP trajectory (from 4.4 per cent projected in FY26 Budget) is likely to cool off bond yields and interest rates. Also, limiting the supply of government bonds may prevent any crowding-out of the private sector from the credit market, thereby helping private sector investments and credit growth," it said.

 

Motilal Oswal Financial Services

With the budget likely to be framed around a nominal GDP growth assumption of about 10.1 per cent, amid US tariff uncertainty, analysts at MOFSL expect the FY27 budget to see a tightrope walk between showing the intended fiscal consolidation and providing a push for capex growth.

 

It expects Budget 2026 to peg 'capex as a percentage of GDP' at 3.1 per cent in FY27, implying a capex budget of ₹12.4 trillion, led by defence and allied industries, infrastructure-linked manufacturing, pharma, power, nuclear, electronics, critical minerals, and trade tariff-affected labor-intensive sector.

 

"Total expenditure growth rate is assumed at 7 per cent Y-o-Y. Capital expenditure (capex) is assumed at ₹12.4 trillion (up 10.3 per cent Y-o-Y), while Revex (revenue expenditure) is expected to grow by 6 per cent Y-o-Y)," it said.

 

MOFSL estimates fiscal deficit target of 4.3 per cent in FY27, and Centre’s Gross borrowings at ₹16.5 trillion versus ₹14.6 trillion in FY26.

 

Of this, Centre's net borrowing could be ₹11.9 trillion (₹11.3 trillion in FY26), and Centre + State gross borrowing at ₹29.7 trillion (₹27 trillion in FY26). Net borrowing, MOFSL said, is expected at ₹21.7 trillion vs ₹20.3 trillion in FY26E.

 

"The benchmark 10-year bond yield has only fallen by 2bp in FY26 due to the demand-supply mismatch, which we believe is likely to continue in FY27 as well... Postponement of the inclusion of Indian bonds in Bloomberg’s Global Aggregate Index, and Japan’s latest rate hike have put upward pressure on the yields. Going ahead, the key event to track will be the announcement of a new US Fed Governor. Overall, we see limited reasons for any softening of India yields," MOFSL said.