Feb 6, 2026
• India’s 2026 budget met muted expectations and was broadly market neutral.
• The subsequent U.S.–India trade deal announcement could be a key near-term catalyst for markets.
• While details are scarce, the deal may help stabilise the rupee and revive FII inflows.
• Improving fundamentals, now reinforced by better sentiment post the deal, are making us increasingly positive on Indian equities.
Trade Deal Overshadows the Budget
The Union Budget 2026 was broadly in line with already low expectations. In recent years, the government has preferred to make major policy announcements outside the budget, using it instead to articulate strategic direction and present fiscal accounts, barring a few measures such as personal income tax relief last year. Many key initiatives, including personal tax cuts, GST rationalisation, and the announcement of the 8th Pay Commission, had already been unveiled earlier. Meanwhile, slower nominal GDP growth has constrained tax revenues. Given the government’s commitment to fiscal consolidation, the budget offered limited scope for any major new announcements.
As expected, the budget adhered to the fiscal consolidation path, with only a modest increase in capex, making it largely a business-as-usual budget. Markets, however, reacted negatively to higher gross borrowing and a sharp hike in STT. This was quickly eclipsed by the subsequent announcement of a U.S.–India trade deal, which aims to cut tariffs on Indian exports to the U.S. to 18% from 50%. The deal could prove to be a meaningful near-term catalyst, potentially stabilising the rupee and drawing FIIs back into the market.
Source: ACE MF, Sanctum Wealth
Above returns are only price change and not total returns
Budget Highlights
The budget is structured around three core “Kartvaya (duties)”:
1. Accelerating economic growth: the budget outlines an ambitious roadmap to scale manufacturing in strategic sectors, revitalize legacy industries, and strengthen India’s infrastructure backbone.
• The budget’s focus on rare earth minerals, data centres, and semiconductors signals an intent to support future areas of growth.
• The budget offers a 21-year tax holiday for foreign cloud service providers using India-based data centres, aiming to boost India’s lagging AI and data centre capex.
• The Biopharma SHAKTI initiative similarly aims to encourage higher-value pharmaceutical manufacturing, potentially helping India gradually move up the global value chain.
• Reduction in PLI incentives may hurt pure-play electronics assemblers short-term, but measures announced benefit semiconductor makers, component manufacturers, and firms pursuing backward integration, supporting India’s long-term competitiveness.
2. Fulfilling aspiration through skilling, health, education and services: the budget seeks to position services sector as a central driver of growth and sets a target to achieve a 10% global share in services by 2047.
• Over past few budgets, the government has focused on skilling. This budget boosts skill development with a 62% increase in the ministry’s outlay.
• India needs to increase its healthcare capacity significantly. In this regard, the budget proposes five Regional Medical Value Tourism Hubs, trains 1.5 lakh caregivers, and adds 100,000 allied health professionals.
• The budget also seeks to bridge the gap between academic output and industry needs in India’s growing services sector.
Social Sector Allocations: FY26 RE vs. FY27 BE
Source: Budget Documents
3. Inclusive Development (“Sabka Sath, Sabka Vikas”): targeted interventions for farmers, Divyangjan (persons with disabilities), mental health, and regional development.
• Focus on raising rural income and generating local employment through promoting women-led rural enterprises like SHE-Marts, supporting high-value crops and developing 500 reservoirs for integrated fisheries.
• Initiatives such as AI integration in agriculture further modernize rural value chains, supporting a broad-based consumption economy.
• The government seeks to strengthen rural demand which has already started to recover.
Many of these measures aim to bolster India’s economy over the long term, but their impact will depend on effective implementation. Past initiatives have often fallen short due to weak execution on the ground.
Key Budget Metrics
• Budget Assumptions: The nominal GDP growth assumption of 10% and tax buoyancy of 11% are conservative, providing the government a margin of safety.
• Fiscal Consolidation: Despite slower nominal GDP growth and lower tax revenues, the government maintained fiscal discipline, targeting a deficit of 4.4% in FY26RE and 4.3% in FY27.
Government maintains fiscal consolidation path
Source: Budget Documents
3. Disinvestment Target: The government targets INR 80,000 crs in FY27 disinvestment. While this government had demonstrated resolve to reduce its role in non-core sectors, past shortfalls suggest there is a risk to undershooting which may strain next year’s fiscal math.
4. Capital Expenditure: After years of high government capex, spending slowed over the past two years due to fiscal constraints and union elections in 2024. Amid similar fiscal constrains Budget 2026 projects an 11.6% capex rise, just above nominal GDP growth, while defence outlay at 17% falls short of expectations. However, transfers to States and UTs surged nearly 30%, signalling a shift of capex responsibility to states and the private sector.
Source: Budget Documents
5. Government Borrowing: The gross market borrowing for FY27 is pegged at INR 17.2 lakh crores (~18% growth year-on-year) is ahead of market expectations. The net borrowing at INR 11.7 lakh crores is in line with expectations. Bond markets reacted negatively to this.
Source: Budget Documents
6. Hike in STT: The government has been concerned about excessive speculation in equity markets, particularly by retail investors. To curb this activity, it increased Securities Transaction Tax (STT) on futures to 0.05% from 0.02% and options premium to 0.15% from 0.10%. STT has risen significantly over the last 2-3 years. Equity markets responded negatively to the move.
Government has been hiking STT over the years
Source: Budget Documents
7. Other announcements: Tax collected at source (TCS) on overseas tour packages, education, and medical expenses was rationalised. Buyback taxation was shifted to a capital gains framework for all shareholders. The government also proposed setting up dedicated REITs to recycle real estate assets of CPSEs.
View on Budget
The budget was largely in line with expectations, with the government sticking to its fiscal consolidation path of recent years. This left little room for major policy stimulus. Measures to support consumption have already been taken, and the government appears to be waiting for their impact. While high-frequency indicators point to a pickup, the recovery remains in nascent stage. The government also seems to have passed the baton on capital expenditure to states and corporates. Private capex hasn’t picked up materially but there are signs of revival. Removal of trade related uncertainty should help corporates take long term capex decisions.
The hike in STT weighed on equity market sentiment, especially amid ongoing FII outflows and market correction. Higher-than-expected gross borrowing dampened bond market sentiment, even as net borrowing stayed in line. Overall, the budget is broadly neutral for equity and bond markets but does outline a roadmap for long-term structural growth of the economy.
India-US trade deal
The budget was largely overshadowed by the long-awaited U.S.-India trade deal. Under the agreement, U.S. tariffs on Indian exports will drop from 50% to 18%, as the penalty on India’s purchases of Russian oil is removed. In return, India has agreed to stop importing Russian crude. At 18%, India is now better positioned than most of its Asian peers. Full details of the deal are yet to be disclosed. While the risk of reversal remains with President Trump, the announcement is clearly positive. Recently, India has also secured trade agreements with the EU and the UK, further strengthening its global trade position.
Foreign investors had been cautious on India due to prolonged tariff uncertainties, contributing to Indian equities lagging emerging market peers in 2025. FII outflows also weighed on the INR, making it one of the worst-performing currencies in 2025. The new trade deal should boost foreign sentiment, especially as valuations versus EM markets have improved and earnings growth is starting to pick up. A revival in foreign inflows could support the INR and ease domestic liquidity pressures as the need for RBI intervention reduces.
Q3FY26 Earnings Results
Q3FY26 earnings have broadly met expectations, though over half of companies are yet to report. Large caps were affected by the new labour code, raising employee costs and impacting PAT growth, with IT most impacted but offering relatively positive commentary. Automobiles and insurance saw strong volume growth following GST cuts. Banks reported steady loan growth and stable margins, while metals are benefiting from a cyclical upswing in commodity prices. FMCG volumes remain weak. Overall, earnings downgrades are expected to be minimal, signalling a gradual recovery after several muted quarters.
Equity Outlook
We are now incrementally positive on Indian equities. High-frequency indicators, vehicle sales, e-way bill collections, and credit growth, point to an improving macro environment, while Q3FY26 earnings have so far met expectations. The budget contained no major negative surprises, pockets of excess valuations have normalised, and India’s relative valuation versus EM markets has improved. The US-India trade deal is a key positive, likely lowering risk premiums and boosting foreign inflows. Risks remain from global geopolitical tensions or a broader market correction, but India is likely to emerge as a relative outperformer.
Foreign inflows could resume after months of outflow
Source: Bloomberg, Sanctum Wealth
Valuations for large and mid-cap Indian equities are reasonable. Small-caps remain expensive at index level, but many small-cap stocks have corrected sharply from 18-month highs, offering attractive entry points. Active managers are likely to find compelling investment ideas that were scarce a few months ago, though investors need to remain patient.
Fixed Income Outlook
Higher government borrowing announcement in the budget pushed bond yields higher. However, the budget’s assumptions on nominal GDP growth and tax buoyancy appear conservative, leaving room for upside. The trade deal could ease the need for the RBI to intervene in currency markets, improving domestic liquidity. The deal also reduces the risk premium on Indian bonds. Meanwhile, the RBI is likely to keep rates unchanged in the near term as it waits for the benefits of the trade deal and recent policy measures to show up in the data.
Given this backdrop, we continue to advise against taking duration risk. The yield curve remains steep, and the scope for gains from longer-maturity bonds is limited. Investors are better served by aligning duration with their investment horizon.
Gold and Silver Outlook
Gold and silver have been volatile in recent days after a sharp rally through December and January. While both metals posted strong gains in 2025, the recent correction has been steep. Gold’s rally has been driven by de-dollarisation and sustained central bank buying, factors that remain firmly in place. Silver, meanwhile, has been supported by strong industrial demand and supply tightness, which also continue.
However, the recent surge was amplified by strong ETF inflows and investor FOMO. Sentiment shifted after Kevin Warsh’s appointment as the next Fed Chair eased concerns around Fed credibility, triggering some reversal in de-dollarisation trades. At the same time, higher margin requirements on COMEX led to forced unwinding and accelerated the correction.
We view this as a healthy correction. Gold’s structural drivers remain intact, and we would look to add on dips. Silver, however, has run ahead of fundamentals, is inherently more volatile, and could face demand risks if global growth slows. We therefore remain cautious on silver for now.
Gold and Silver prices corrected sharply after a strong rally
Source: Bloomberg, Sanctum Wealth
Technical Outlook: Equities & Precious Metals
View on Equity: Nifty has broken below its 200-day moving average (DMA) support at the 25,000 level during the Budget session, forming a panic low at 24,591. The next major support is placed near 24,300, which coincides with the August 2025 low as well as the 100-week simple moving average. This 100- week moving average has not been breached since the COVID period, and historically, major upswings have emerged from this zone. Given the confluence of long-term supports, the 24,300 level is expected to remain resilient and is unlikely to be breached in the short to medium term. On the upside, the immediate short-term hurdle remains at the 26,300 level.
Source: trading view
View on Gold:Gold witnessed a sharp fall after making a lifetime high near $5,600, plunging almost 20% from the top levels. We expect gold to hold the support around $4,300 and consolidate, which should help subside volatility. However, a breach below $4,300 could push prices lower toward the strong support near $3,700.
Source: trading view
View on Silver: Silver witnessed sharp volatility last week and saw significant profit-taking, with prices correcting from around $121 to $75. We expect heightened volatility to persist in the near term and prefer to wait for price action to stabilize before taking a fresh directional view. On the downside, short-term support for silver is seen at $74, followed by a stronger base near $62.
Source: trading view
