As the government prepares Budget 2026 amid persistent global uncertainty and sustained foreign portfolio outflows, market participants are closely monitoring for signals that could revive investor confidence. Gaurav Bhandari, CEO at Monarch Networth Capital, expects the upcoming Budget to be reform-oriented and explicitly FII-friendly, focusing on improving India's attractiveness as an investment destination.

December Quarter Earnings Outlook

Bhandari anticipates decent but not spectacular performance for the December quarter earnings. The following table summarizes his expectations:

While certain pockets like banks and select industrials may show resilience, overall earnings growth will remain moderate on an aggregate basis.

Budget 2026 Reform Expectations

With foreign investors remaining net sellers for much of the past few years, Bhandari believes the government will introduce measures to stem capital outflows and strengthen long-term investor sentiment. He expects a strong reform-oriented budget with specific focus areas:

• Taxation relief for Foreign Institutional Investors
• Enhanced regulatory clarity
• Policy measures to arrest capital flight
• Initiatives to boost India's investment destination appeal

Given sustained FII outflows over the past 3-4 years, he anticipates the government will actively attempt to enhance India's attractiveness as an investment destination.

Currency and Market Dynamics

Regarding the rupee's recent weakness, Bhandari does not foresee depreciation to ₹100 per USD. His currency outlook includes:

He expects the government and RBI to take strong corrective measures, particularly to boost exports and manage currency volatility, with no cause for panic from an investment standpoint.

Sector Preferences and SIP Flow Impact

Bhandari remains positive on specific sectors for medium-to-long-term portfolios:

PSU Banks: Supported by improving balance sheets, better asset quality, and attractive valuations

Defence: Backed by strong order books, indigenization efforts, and sustained government spending

Domestic SIP flows have been a key stabilizing force for Indian equities, and this trend is expected to continue. Financialization of household savings, rising investor awareness, and long-term wealth creation themes should keep SIP inflows robust and consistent, providing a cushion against intermittent foreign selling.

Growth Outlook and Economic Projections

Despite geopolitical concerns and trade tensions, Bhandari estimates the Indian economy should grow in the range of 7.40-7.60% in the current financial year. Domestic consumption will continue to be the backbone of Indian growth, with India's structural strengths, demographic advantage, and policy continuity providing confidence that growth momentum can be sustained despite global uncertainties.

Tax policy experts have presented comprehensive recommendations for Budget 2026 to enhance India's mergers and acquisitions environment, particularly with the Income-tax Act, 2025 scheduled for implementation from April 1, 2026. The suggestions aim to address existing regulatory gaps and improve the ease of doing business for M&A transactions.

Fast-Track Demerger Tax Neutrality

A primary recommendation involves extending tax neutrality to fast-track demergers under Section 233 of the Companies Act, 2013. Currently, the Income-tax Act, 2025 provides tax neutrality only to NCLT-approved demergers under Sections 230 to 232, excluding fast-track demergers that enable small or closely held companies to undertake demergers without court approval.

The finance ministry's rationale for excluding fast-track demergers centers on concerns about potential valuation manipulation without court oversight. However, experts argue this approach contradicts the ease of doing business agenda, forcing genuine taxpayers to choose between transaction efficiency and tax benefits.

Contingent Consideration Clarity

Experts emphasize the need for clear taxation guidelines on earn-out, profit-linked, or contingent consideration arrangements that have become increasingly common in M&A transactions. These arrangements tie part of the sale consideration to achieving specific profitability or financial milestones.

The current legal framework lacks clarity on:

• Taxability of contingent payments
• Timing of taxation for such arrangements
• Treatment of milestone-based considerations

Foreign Company Merger Anomalies

The recommendations address existing inconsistencies in foreign company merger taxation. While foreign companies enjoy capital gains tax exemptions on direct or indirect share transfers during mergers with other foreign companies, shareholders of the amalgamating company face potential capital gains liability on share swaps.

This creates an anomaly compared to domestic mergers, which provide exemptions at both company and shareholder levels.

Capital Gains Tax Rate Concerns

The recent capital gains tax regime rationalization introduced higher long-term capital gains tax rates, which experts suggest adversely impacts investor returns and exit efficiency. The increased rates potentially drive investors toward jurisdictions with more favorable tax regimes.

Key concerns include:

• Reduced post-tax returns for investors
• Decreased competitiveness with other investment destinations
• Impact on foreign capital attraction

Experts recommend reducing capital gains tax rates, suggesting restoration of the earlier 10.00% rate to improve India's competitive position in attracting foreign investment.

Strategic Implementation Timeline

With the Income-tax Act, 2025 set for April 1, 2026 implementation, Budget 2026 represents the final opportunity to incorporate these amendments before the new framework takes effect. The recommendations aim to position India as a preferred destination for cross-border M&A activities while maintaining regulatory integrity and supporting corporate growth objectives.