Pankaj Pandey, head of research at ICICI Securities, expects Budget 2026 to largely continue the government's focus on manufacturing, capital expenditure, and fiscal prudence. Despite anticipating modest overall capex growth given the high existing base, specific sectors like defence and railways are positioned for significant allocation increases.

Budget 2026 Capital Expenditure Outlook

The expert anticipates modest growth in capital expenditure, considering the substantial existing base and historical performance:

Despite the overall modest expectations, defence and railways are expected to receive prioritised allocations. Railways specifically may see increased funding for new high-speed corridors, Vande Bharat trains, and Kavaach programmes.

Defence Spending Projections

The defence sector is positioned for substantial budget increases, driven by the government's modernisation focus:

The Defence Ministry targets achieving a defence capital budget-to-GDP ratio of 0.80% over the next five years, representing a substantial increase from the current 0.50% of GDP.

Sectoral Focus Areas

Several sectors are expected to receive targeted support in Budget 2026:

Real Estate: Expected to receive support due to its 7-8% GDP contribution, correlation with allied industries like cement and steel, and status as the second-largest employer after agriculture. Affordable housing may see relief measures including expanded definitions for value and unit sizes.

Textiles: The industry, employing nearly 45 million people, faces pressure from high US tariffs on Indian exports. Expected policy measures include relief schemes, tax concessions for new units, and potential permanent removal of the 11% cotton import duty.

Mining: Increased budgetary allocation expected for rare earth minerals mining and processing.

Consumption and Tax Policy

Pandey sees limited scope for new consumption acceleration measures, noting the government has already engaged in front-loading through reduced personal income tax rates and rationalised GST rates. With constrained fiscal room, no major new consumption measures are expected, though minor tweaks to personal income taxation remain possible to shift individuals from old to new tax regimes.

Q3 Earnings Assessment

Early Q3 results indicate stabilisation trends across key sectors:

IT Sector: Shows early signs of stabilisation despite continued headwinds from US macro uncertainty and geopolitical tensions. Select growth pockets emerged across verticals and geographies, with improved deal activity and larger-deal TCV wins indicating better demand visibility.

Banking Sector: Credit growth has improved to 10-12%, driven by retail and MSME segment traction with strong competitive intensity in home and auto loans. Asset quality remains resilient across segments, with stress in MFI and unsecured retail largely bottoming out.

Investment Strategy Recommendations

Amid increased geopolitical risks and market volatility, with headline indices down 4% since early 2026, Pandey recommends focusing on companies with healthy capital efficiency (RoE and RoCE above 15%), strong balance sheets (debt-to-equity below 1), and growth longevity. For medium-term investment, BFSI, capital goods, IT, and real estate sectors are positioned at the top of the recommendation list, with sector rotation expected as the core theme.

With just 8 days remaining until Union Budget 2026, market sentiment on Dalal Street reflects cautious optimism rather than the traditional pre-budget excitement. The Nifty has already declined by more than 1.80% in January, adding to investor anxiety about potential deeper corrections ahead of the February 1 budget announcement.

Historical January Performance Weighs on Sentiment

Market data reveals a concerning pattern for investors during the budget season. Over the last 10 years, both Nifty and Sensex have delivered negative returns in January on 8 occasions, with January and February frequently disappointing investor portfolios. This historical trend, combined with current market conditions, has dampened expectations for a robust pre-budget rally.

India's fiscal position adds another layer of complexity to budget expectations. The country's fiscal deficit has already reached nearly 62% of the FY26 target, significantly limiting the government's room for aggressive spending announcements that typically drive market enthusiasm.

FII Selling Pressure Dampens Rally Prospects

Vinayak Magotra, Product Head & Founding Team at Centricity WealthTech, highlighted the unprecedented selling pressure from foreign investors. "There has been persistent and aggressive FII selling that has clearly weighed on sentiment, with last year witnessing withdrawals of nearly ₹3 lakh crore and the current year beginning on a similarly defensive note," Magotra explained.

The positioning data reveals FIIs are heavily net short in index futures, indicating that any market rallies are being actively sold into, particularly at higher levels. This selling pressure has contributed to sharp corrections across key large-cap stocks including Reliance, L&T, and TCS, suggesting institutional support remains weak at current valuations.

Global Headwinds Add Market Complexity

Current market conditions differ significantly from previous budget cycles due to elevated global uncertainties. Geopolitical tensions, US tariff uncertainties, high bond yields, and ongoing trade conflicts have created a more complex investment environment. "Markets are far more sensitive to global developments than domestic policy headlines right now," Magotra noted.

These global factors have made investors more cautious about domestic policy announcements, potentially reducing the traditional impact of budget-related market movements.

Potential Budget Catalysts for Sector-Specific Moves

Despite the challenging environment, certain budget announcements could still generate short-term market excitement in specific sectors:

"Any signal around rural income support, agriculture spending or fertiliser subsidies tends to move these stocks quickly. Overall, the budget can trigger sector-specific moves, but markets will quickly shift focus back to fiscal deficit, government capex, earnings and global cues," Magotra explained.

Investment Strategy Recommendations

Given the current market environment, experts recommend a measured approach to budget-related investment decisions. "Investors should align portfolios with their long-term asset allocation and risk tolerance, rather than trying to predict budget outcomes," Magotra advised.

Event-driven, short-term trades are best avoided as expectations are often already priced into market valuations, and immediate reactions can prove volatile and misleading. Instead, any budget-related volatility should be used for portfolio rebalancing rather than speculation.

Market-Friendly Budget Expectations

A truly market-friendly budget in 2026 would focus on avoiding negative surprises while providing targeted support to key sectors. Infrastructure, renewables, manufacturing, and defence sectors could benefit from continued government emphasis on capital expenditure and self-reliance initiatives.

Export-oriented sectors may also receive attention if the government addresses delays in India-US trade negotiations. However, capital market-specific relief measures, such as rationalization of Securities Transaction Tax or capital gains taxes, may improve sentiment only marginally unless accompanied by broader macroeconomic triggers.