As policymakers prepare for Budget 2026 amid complex global challenges including geopolitical uncertainty and trade tensions, market experts anticipate a measured approach focusing on growth support and macro stability. Niraj Kumar, CIO and Chief of Business Transformation & Strategy at Generali Central Life Insurance, expects the government to prioritise capital expenditure and policy continuity over dramatic reforms while maintaining targeted sectoral support.

Budget 2026 Expectations and Fiscal Strategy

Kumar anticipates Budget 2026 will reaffirm policy continuity and strengthen the ongoing agenda of growth and macroeconomic stability. The government is expected to maintain fiscal consolidation as a key priority, with medium-term targets aiming to reduce the fiscal deficit to 4.20% in FY27E.

The slower pace of fiscal consolidation compared to previous years is expected to create more room for capital expenditure growth. Sectoral support will likely be calibrated and targeted, focusing on infrastructure, MSME credit, manufacturing, and strategic areas rather than broad-based stimulus measures.

Market Outlook and Earnings Recovery

Despite geopolitical uncertainties, Kumar maintains a structurally favourable outlook for 2026. He expects the December quarter earnings to mark the commencement of earnings recovery after several quarters of weakness. The recent fiscal and monetary stimulus is anticipated to create broad-based earnings growth across multiple sectors.

Domestic Investment Flows and Market Stability

Domestic SIP inflows are expected to remain a strong stabilising force in 2026, building on the momentum from 2025 when annual contributions surpassed ₹3.00 lakh crore and monthly inflows consistently stayed above $3.00 billion. This sustained momentum highlights the structural strength of domestic liquidity, supported by rising financial awareness and disciplined retail participation.

The combination of time correction, broader market decline, and more reasonable valuations, alongside expectations of accelerating growth from Q3 FY26, should help moderate foreign institutional investor outflows and create a more balanced tone for foreign participation.

Currency and Economic Growth Projections

The Indian government has projected economic growth of 7.40% in fiscal 2025-26, with nominal GDP expected to grow by 8.00% in the current fiscal, compared to 9.70% last year. Kumar believes India will remain one of the fastest-growing major economies globally, despite headwinds from geopolitical tensions and trade fragmentation.

Regarding currency concerns, the rupee's movement toward the 90-91 range has been driven by heightened uncertainty and elevated gold prices, which have worsened the trade balance, expanding the trade deficit to over $40.00 billion. However, Kumar notes that RBI intervention through dollar sales and swap auctions should help smooth volatility.

Sector Recommendations and Investment Strategy

Kumar expects financials to be well-positioned for strong performance in 2026, supported by moderating interest rates, gradual regulatory easing, and accelerating loan growth. Within this sector, microfinance appears to have moved past its most difficult phase, with growth momentum improving.

For precious metals, which performed strongly in 2025, Kumar recommends maintaining a 10-15% portfolio exposure depending on risk appetite, while suggesting some profit-taking after the recent rally. He believes precious metals should remain part of core portfolios as a hedge against inflation and currency debasement amid ongoing geopolitical uncertainties.

India's economic performance has exceeded expectations in fiscal 2026, demonstrating remarkable resilience amid global uncertainties. The favorable growth-inflation mix has been supported by accommodative monetary and fiscal policies, robust corporate balance sheets, and beneficial external factors including above-normal monsoon conditions and subdued crude oil prices. Trade performance has been cushioned through strategic measures including front-loading of exports, exemptions for electronics and pharmaceuticals sectors, and a high proportion of service exports that remain less exposed to potential tariff impacts.

Economic Growth Projections

The economic outlook presents a mixed picture for the coming fiscal year. Real GDP growth is projected to moderate while nominal growth is expected to accelerate as inflation conditions normalize.

This shift in growth dynamics is expected to support both tax collections and corporate revenues, providing a foundation for sustained economic performance.

Fiscal Policy Framework

The central government has maintained fiscal discipline over the past decade, with exceptions only during pandemic-related emergencies. This track record of fiscal rectitude is expected to continue, with the upcoming Union Budget likely to maintain the fiscal deficit target at approximately 4.4% of GDP for FY27, consistent with the current year's objective.

Despite this fiscal discipline, government bond yields have remained elevated, attributed primarily to states borrowing beyond their budgeted allocations. This situation underscores the critical need for fiscal discipline across all tiers of government and highlights the importance of reviving the Public Sector Borrowing Requirement (PSBR) as a comprehensive measure of the nation's fiscal health.

Investment Landscape and Sectoral Focus

Capital deepening remains essential for elevating India's growth trajectory. While government and household investments have driven post-pandemic growth, the overall investment-to-GDP ratio remains around 30.00%. Private investments are showing encouraging signs of recovery, with the momentum expected to allow the private sector to gradually assume the capital expenditure leadership role from the government.

The nature of investment is undergoing significant transformation. Emerging sectors are gaining prominence in the industrial capital expenditure landscape:

Strategic Sector Development

The Production-Linked Incentive (PLI) scheme and emerging sectors including electric vehicles, semiconductors, electronics, photovoltaic cells, and data centres are expected to drive this transformation. Recent policy developments include the opening of the insurance sector to 100.00% foreign direct investment, alongside ongoing reforms in labor laws and regulatory structures aimed at reducing compliance burdens.

Incentive structures with sunset clauses have proven effective in promoting investments in segments such as electronics under the PLI framework. The approach emphasizes prioritizing scale initially before focusing on higher value addition in specialized areas like advanced carbon composite batteries, where investment-to-incentive ratios are substantial.

Long-term Vision

The government's ambitious Viksit Bharat target of achieving developed economy status by 2047 provides the overarching framework for policy decisions. Each budget serves as a stepping stone toward this long-term objective, requiring sustained focus on domestic growth drivers while maintaining macroeconomic stability amid global uncertainties.