Budget 2026-27: Higher borrowing plan, STT move hit market sentiment

A surprise STT hike in Budget FY27 triggered a sharp market sell-off, with banks and metals hit hard amid worries over borrowing, bond yields and financial conditions

Most proposals in the Union Budget matched expectations but the hike in securities transaction tax (STT) jolted markets. While the government stuck to its fiscal consolidation path and increased capital expenditure (the gains from which will be felt in the medium to long term), the hike in STT after two years saw a sharp selloff. The markets expected relief in long-term capital gains tax and personal taxation but the only positive they got was lower tax on buyback from minority shareholders.

 

Benchmark indices fell up to 1.96 per cent after the STT hike decision and most sectoral indices — led by public sector banks and metal stocks — were in the red. The exception was the information technology index, which closed in the green after the Budget announced major changes in the safe harbour margin regime for the sector.

 

Among sectoral indices, the biggest loser was the Nifty Bank index, shedding 5.6 per cent in trade. The Budget put the government’s gross market borrowing for FY27 at ₹17.2 trillion — higher than expectations and leading to concerns that it could weigh on bond yields. This will mean continued market concerns around large Central and state government bond supplies next year, according to Sonal Varma, Nomura’s chief economist (India and Asia ex-Japan).

 

Rising yields will likely translate to mark-to-market losses for treasury portfolios of banks, especially government-owned, and impact their profitability.

 

Debt fund managers, such as Amit Modani of Shriram AMC, however, believe that though the gross borrowing at ₹17.2 trillion was larger than expectations, it was mostly due to ₹5.5 trillion in old debt repayments or redemptions. A net borrowing of ₹₹11.7 trillion should keep the trajectory stable. The market expects the Reserve Bank of India’s liquidity support to keep bond yields in check, said Modani.

 

The Budget allocated ₹12.22 trillion to capital expenditure for FY27: 9 per cent more than the year-ago Revised Estimates levels and accounting for 4.4 per cent of the gross domestic product, making the amount the highest level in a decade. The key concern is that the rise in capital expenditure comes at a time when tax revenues are “undershooting”, according to Saurabh Mukherjea, cofounder and chief investment officer of Marcellus Investment Managers.

 

Funding higher capex through increased borrowing risks tightening financial conditions by pushing up bond yields and the economy’s cost of capital, he said.

 

Metal stocks saw a sell off with the Nifty Metal falling over 4 per cent, though this had more to do with the bearish sentiment for global commodities. Brokerages believe that steel stocks could benefit from the Budget’s proposal to build seven high-speed rail corridors and produce train coaches. Mining companies could gain from allocation to establish dedicated rare earth corridors. Defence stocks came under pressure as markets expected allocations to be higher than the 15 per cent increase in defence outlay for FY27.

 

With no immediate positive triggers for the markets, Amnish Aggarwal, director, institutional research, at Prabhudas Lilladher Capital, believes the economy is yet to fully see the benefits of last year’s measures in income taxes, interest rates, GST rationalisation, which will be seen during the course of FY27.

 

Monetary policy, the ongoing earnings season, growth outlook and global developments will drive the markets in the near term, analysts said.