As the Indian government prepares to present Union Budget 2026-27 on February 1, stock market investors are bracing for the typical pre-budget volatility that has characterized Indian markets for over a decade. Historical data reveals a consistent pattern of market weakness ahead of budget presentations, driven by uncertainty over policy announcements and fiscal measures.

Historical Market Performance During Budget Season

Data from 2010-2022 demonstrates that Indian stock markets frequently experience downward pressure in the lead-up to Union Budget presentations. This trend reflects investor caution amid fears of unexpected policy changes that could impact various sectors and market segments.

The data shows that over the past 15 years, Nifty has posted negative returns in the month preceding the budget in four out of the last five years, including a decline in January 2025. Despite this pre-budget weakness, markets typically stage recoveries post-budget, with an average gain of 1.36% in the week following budget presentations.

Factors Driving Pre-Budget Market Weakness

The consistent pattern of pre-budget market decline stems from several key factors that create uncertainty among investors. Policy surprises remain the primary concern, as budget announcements can significantly impact sector-specific performance and overall market sentiment.

Elevated volatility characterizes budget periods, with the average intraday trading range reaching 2.65% on budget day itself. This heightened volatility reflects the market's attempt to price in potential policy changes and fiscal measures before official announcements.

Key factors contributing to pre-budget weakness include:

• Fear of unexpected policy announcements
• Uncertainty over fiscal deficit targets
• Anticipation of sector-specific tax changes
• Global economic headwinds and geopolitical tensions

Budget 2026 Expectations and Market Outlook

For Union Budget 2026, market expectations center on balancing fiscal prudence with growth stimulus amid global challenges. Rahul Sharma, Director and Head of Technical and Derivative Research at JM Financial Services Ltd, noted that key anticipations include increased capital expenditure on infrastructure, defense, and railways to shield the economy from external shocks.

CareEdge Ratings expects the fiscal deficit to GDP to be contained at 4.4% in FY26, with projections for fiscal deficit to be budgeted at 4.2-4.3% in FY27. The rating agency anticipates gross borrowing in the range of Rs 16-17 trillion in FY27 and net borrowing likely at Rs 11.5-12 trillion.

Recent Market Performance and Current Conditions

The domestic equity market ended the previous week on a weak note, with the Sensex dropping 770 points or 0.94% to close at 81,537.70, while Nifty fell 241 points or 0.95% to end at 25,048.65. This decline was attributed to profit booking, continued foreign investor selling, and uncertainty over geopolitical issues.

Trading remains suspended on Monday, January 26, due to the 77th Republic Day holiday, with markets set to resume on Tuesday. Investors are positioning cautiously ahead of multiple key events, including the Union Budget, US Federal Reserve meeting, ongoing corporate earnings, and global developments.

Historical Budget Performance Analysis

Recent budget presentations have shown mixed market reactions, reinforcing the pattern of short-term volatility followed by longer-term reassessment. Budget 2025, which prioritized income tax cuts to spur private consumption, saw benchmark indices close flat on budget day, though markets declined sharply in the following month.

Budgets 2023 and 2024 exhibited similar patterns with cautious optimism on policy intent but mixed market reactions. In contrast, Budget 2017 delivered more immediate positive responses with tax relief measures, while Budget 2016's rural-focused initiatives initially disappointed markets before staging recovery in subsequent weeks.

Market participants are advised to maintain cash positions until post-budget clarity emerges, with selective opportunities expected in sectors like defense and PSU banks. The consistent historical pattern suggests that while pre-budget weakness is typical, patient investors often benefit from post-announcement market adjustments and policy clarity.

As India prepares for Union Budget 2026-27 scheduled for February 1, 2026, corporate India is hoping for clarity on taxes, reforms, and policy priorities that can unlock the next leg of economic momentum toward achieving the $5-trillion economy goal. According to industry experts, capex growth is expected to stay central on the agenda, while addressing opportunities in AI-led growth, digital infrastructure, manufacturing expansion, and energy transition.

Critical Role of Alternative Investment Funds

Alternative Investment Funds (AIFs) play a critical role in financing parts of the economy where traditional channels are less effective. Rajini Vislavath, CIO Alternatives at LGT Wealth India, emphasizes how early-stage companies, infrastructure projects, stressed or transitional assets, and MSMEs increasingly rely on patient, risk-tolerant capital.

The expert notes that private equity, venture capital, private credit, and real asset funds are no longer niche products but have become essential components of long-term capital allocation. However, despite strong demand and a growing domestic savings pool, India's AIF ecosystem remains constrained by structural and policy frictions.

Key Reform Areas for AIF Growth

Vislavath outlines several targeted steps needed to meaningfully expand India's alternative investment base:

Strategic Sector Focus

The expert recommends strategic policy emphasis on key growth sectors where AIFs can have transformative impact:

• Technology and Deep Tech: AI, semiconductors, biotech
• Renewables and Transition Finance: Energy sector transformation
• Logistics and Supply Chain Infrastructure: Operational efficiency improvements
• Healthcare: Innovation and accessibility enhancement

Incentives, whether fiscal, regulatory, or infrastructure-related, can steer private capital into these strategic domains, accelerating innovation and competitiveness.

Long-term Capital Confidence

From a fund manager's perspective, the Budget's importance lies less in immediate inflows and more in the signal it sends to long-term capital. Alternative investments are built on trust that capital can be deployed efficiently, returns realized predictably, and policies applied consistently.

If the Budget addresses core structural issues around taxation, access, and regulatory clarity, it will reinforce India's position as a credible and competitive destination for alternative capital. This approach can support entrepreneurship, infrastructure creation, and credit expansion without increasing the fiscal burden on the state.

The market seeks not dramatic reform, but thoughtful, durable change that enables confidence and long-term participation in India's economic growth story.