Markets are approaching Budget 2026 with measured expectations amid elevated geopolitical risks and uneven global growth, with investor focus firmly on policy clarity and taxation reforms. Rohit Agarwal, Executive Vice President and Senior Fund Manager at Kotak Mahindra Life Insurance, believes the upcoming budget may offer significant relief on capital gains taxation while creating opportunities for positive market surprises.

Budget 2026 Expectations and Tax Relief Prospects

The market is entering the budget cycle with measured expectations after experiencing muted returns in recent months, creating scope for positive policy developments. Following submissions made by foreign institutional investors regarding capital gains taxation complexity, there is a strong possibility that some relief may be considered in Budget 2026.

Foreign investors have argued that the current taxation method is overly complex, leading market participants to expect meaningful announcements addressing these concerns. The government is also expected to announce a glide path towards bringing the debt-to-GDP ratio below 50.00%.

December Quarter Earnings and Market Outlook

December quarter earnings are expected to show single-digit growth on a year-on-year basis, aligning with market expectations. Several sectors are experiencing positive sentiment due to improving demand following recent GST cuts. The rupee's depreciation is expected to provide temporary margin benefits for IT companies, though this advantage may diminish as pricing adjustments occur over time.

Geopolitical risks are likely to persist, already reflected in movements of gold and other safe-haven assets. The pending trade deal with the USA, delayed for various reasons, could continue to create market sentiment uncertainty in the near term.

Domestic SIP Flows and Currency Dynamics

Domestic SIP inflows have served as a crucial buffer against foreign sell-offs and are expected to maintain their steady rise throughout 2026. Investors are increasingly viewing SIPs as a long-term investment approach, with reduced churning and aggressive fund switching behavior.

The rupee at ₹90.00 has provided relief to exporters facing tariff pressures. On an inflation-adjusted basis, the Indian rupee appears undervalued against the US dollar, with expectations of partial correction once the trade deal materializes.

Sectoral Recommendations and Banking Focus

Private sector banks are positioned to perform well in 2026 as they shift focus back to growth with the rate cut cycle nearing completion. During the declining interest rate environment of recent periods, NBFCs held advantages as their liabilities repriced faster while many loans remained at fixed rates, supporting margins.

With one more rate cut expected in February or April, private banks are likely to deliver mid-teen operating profit growth as margins near the end of their decline phase.

Economic Growth Projections

The Indian government has projected economic growth of 7.40% for fiscal 2025-26, with nominal GDP expected to grow by 8.00% in the current fiscal against 9.70% last year. Despite geopolitical concerns and trade tensions, India should maintain growth of around 6.00% to 7.00%. Government initiatives including large GST rate cuts have begun reviving demand, while RBI's liquidity support has moved the banking system to a surplus position, helping credit growth increase by 200-300 basis points from below 10.00%.

Vikas Khemani, Founder and CIO of Carnelian Asset Management & Advisors, has outlined comprehensive expectations for Budget 2026, emphasizing the need for sustained capex execution, enhanced R&D investment, and meaningful tax reforms to maintain India's growth trajectory. Speaking on market valuations and policy priorities, Khemani presents a measured outlook for India's economic prospects amid global uncertainties.

Capex Allocation Expected to Exceed ₹11 Lakh Crore

Khemani expects the government's capex allocation to surpass the previous ₹11.11 lakh crore benchmark, supported by higher tax collections and continued focus on capacity building. He emphasizes that government capex extends beyond direct budgetary allocations through SPV-led projects and PPP models.

"More than allocations, the real challenge today is execution capacity," Khemani noted, highlighting that India faces greater constraints in project implementation than in securing financing across private sector, PPP, and government-led initiatives.

SIP Growth and Financial Market Dynamics

With SIP contributions reaching ₹30,000-31,000 crore, Khemani acknowledges the positive trend in household savings financialization while noting structural challenges. He points out that household exposure to financial assets remains in single digits, with potential to reach 15-20.00%.

The shift toward SIPs, combined with new tax regimes, has reduced attractiveness of bank fixed deposits, creating challenges for the banking system. Banks' loan-to-deposit ratios are approaching peak levels, potentially constraining credit flow despite RBI rate cuts.

Equity Market Outlook for 2026

Khemani maintains an optimistic stance on India's equity markets, drawing parallels to the recovery pattern seen in 2022-2023. He views current Nifty PE ratios of 20-21 times as reasonable, neither expensive nor cheap.

"Fundamentally, there is nothing negative from a directional perspective," Khemani stated, citing strong monetary stimulus, supportive fiscal measures, robust government spending, and healthy GDP growth as positive factors.

Key Budget 2026 Expectations

Khemani has outlined four specific policy recommendations for the upcoming budget:

R&D Investment Initiative: Implementation of a CSR-like mechanism requiring companies to contribute a fixed percentage of profits toward research and development, supporting long-term nation-building objectives.

Capital Markets Tax Reform: Elimination of double taxation by removing either STT or capital gains tax, addressing the current burden on investors and market participants.

Dividend Taxation Relief: Revision of dividend taxation structure, suggesting either zero tax or a flat 10.00% rate instead of the current maximum marginal rate applied after corporate tax payments.

Export Sector Support: Provision of incentives, rebates, and credit support for sectors directly impacted by tariff uncertainties, particularly textiles and export-oriented segments, to prevent permanent damage and job losses.

Economic Fundamentals and Growth Prospects

Khemani emphasizes that India's long-term growth story remains intact, supported by multiple positive indicators including strong GST collections, pickup in private capex, and healthy insurance premium collections. He expects 2026 to outperform 2025, contingent on global conditions evolution.

The current market environment represents a "tug of war between strong domestic macros and global concerns," which historically tends to resolve favorably over time. Khemani notes India's significant underperformance versus other emerging markets creates opportunities for capital deployment, with the current vintage potentially delivering strong outcomes similar to the successful 2022 investment cycle.