The era of dramatic market swings on Budget Day appears to be ending, as India's financial markets show increasingly muted reactions to the Union Budget announcement. This shift reflects a fundamental change in how policy decisions are communicated and implemented throughout the year.

Market volatility around Budget Day has declined significantly, with expectations becoming more measured as investors focus on medium-term policy direction rather than single-day announcements. The finance ministry will present the FY27 Budget on 1 February 2026, at a time when it appears fairly placed to meet its 4.4% of GDP fiscal-deficit target, despite weak nominal GDP growth and sharp cuts in personal income tax and GST.

Diminishing Budget Day Impact

A comprehensive analysis reveals that Budget Day has failed to stir markets meaningfully over the past three years. The data shows a clear pattern of reduced market reaction:

"The Budget is no longer the sole 'Big Bang' now," said Dhiraj Relli, managing director and chief executive of HDFC Securities. This transformation stems from policymaking becoming more continuous, predictable, and front-loaded, with key reforms and incentives now rolled out through cabinet decisions, press releases, and GST Council meetings throughout the year.

Pre-Budget Positioning Becomes Key

Historical data from the past 16 years demonstrates that markets typically make their biggest moves well before Budget Day, leaving the actual speech with limited impact. The pattern shows investors increasingly position themselves in advance rather than react to announcements.

Notable examples include 2021, when the Sensex rallied 22% in the three months leading up to the Budget, only to slip 2% in the final 15 days and show a marginal 0.25% move on Budget Day. Similarly, in 2022, the index fell about 3% in the 15 days before the Budget, while the three-month return was 0.2% and Budget-day gain stood at just 1.2%.

Historical Volatility Patterns

The shift becomes more apparent when comparing recent years with earlier periods. Budget Day was once marked by sharp market swings rather than lacklustre moves:

Since 2010, the three months before the Union Budget have consistently been marked by elevated volatility. In nearly half of these years—eight in total—the benchmark index has declined during this pre-Budget phase, reflecting rising uncertainty as investors attempt to price in policy signals ahead of time.

Sector Impact Remains Significant

Despite reduced overall market volatility, the Budget continues to influence sector leadership throughout the year. The 2025 focus on consumption led to rallies in fast-moving consumer goods (FMCG) and automobile stocks, while the defence sector experienced profit-booking.

Market consensus suggests the upcoming Budget will emphasize:

• Increased capex on infrastructure, defence, and railways
• Higher defence outlay to buffer the economy
• Support for MSMEs, manufacturing, and green energy
• Focus on artificial intelligence and export promotion

Economic Outlook and Fiscal Targets

Brokerages have provided mixed assessments for the upcoming Budget. Kotak Institutional Equities pegged FY27 GDP growth at 4.3%, factoring in slower fiscal consolidation and sustained capex, particularly in defence and state loans. BofA Securities noted in a 14 January report that the Ministry of Finance remains on track to hit its medium-term fiscal target of below 4.5% of GDP.

According to Madhavi Arora, chief economist at Emkay Global Financial Services, the Budget will be closely tracked for signals on bond yield trajectory, fiscal consolidation approach, and both pace and quality of capital expenditure allocations. Steps to ease the tax regime for foreign investors will also be crucial for improving India's investment appeal.

This evolution from event-based to process-led policy represents a maturing market where continuous reforms have replaced the traditional 'surprise factor' of Budget Day, signaling a more predictable and stable policy environment for long-term investors.

Indian stock markets are grappling with sustained foreign portfolio investor (FPI) outflows, prompting calls for long-term capital gains (LTCG) tax reduction in the upcoming Budget 2026. The market's underperformance relative to Asian peers has intensified focus on policy measures that could restore foreign investor confidence.

Record FPI Outflows Continue

According to NSDL data, FPIs have net sold Indian stocks worth significant amounts, creating substantial market pressure. The selling pattern shows sustained foreign investor exodus across multiple months.

The sustained selling pressure led to a 2.5% decline in Nifty for the week ended January 23rd, highlighting the significant impact of foreign investor sentiment on market performance.

Market Performance Amid Challenges

Despite extending its annual bull run to the 10th consecutive year, Indian markets showed relative underperformance. The BSE Sensex rose 9% last year, but this return was substantially lower than the 16-68% returns offered by some Asian peers, including Pakistan's KSE 100 index. The underperformance stemmed primarily from sentiment issues and missing foreign flows rather than weak fundamentals.

Budget 2026 Expectations

Market participants are advocating for specific tax policy changes to improve investor sentiment:

• LTCG Tax Reduction: From current 12.5% to 10%
• STT Rollback: To encourage higher FPI participation
• Enhanced Exemption Limits: Building on current ₹1.25 lakh threshold

The government had reintroduced LTCG tax on equities in Budget 2018 at 10% with ₹1 lakh exemption. However, in 2024, the LTCG tax rate was raised to 12.5% with exemption limit of ₹1.25 lakh, while STCG increased to 20% from 15%.

Expert Analysis on Tax Cut Impact

Khushi Mistry, Research Analyst at Bonanza, noted that demand for lower capital gains taxes merits consideration amid 2025's market underperformance and FII outflows, as cuts historically boosted retail participation during the 2004 LTCG exemption era.

However, analysts remain cautious about the standalone impact of tax cuts. Harshal Dasani, Business Head at INVasset PMS, explained that even modest LTCG cuts would improve post-tax returns marginally but may not materially change the risk-reward equation for large offshore funds that allocate capital based on growth durability, liquidity depth, and macro stability.

Broader Factors Affecting FPI Flows

According to Dr VK Vijayakumar, Chief Investment Strategist at Geojit Investments Limited, two key factors could resume FPI buying in India:

• Corporate Earnings Improvement: Expected in Q4 FY26
• India-US Trade Deal: Timeline remains unclear, creating market uncertainty

Mistry believes that while tax reductions could trigger short-term rallies through sentiment improvement, similar to post-2004 gains, they won't guarantee sustained bull runs without accompanying earnings growth. The analyst emphasized that while tax tweaks provide support, macroeconomic factors and FII flows remain dominant market drivers.

The ongoing FPI selloff reflects broader concerns including weakening Indian rupee, elusive India-US trade deal progress, and slowing earnings growth, suggesting that comprehensive policy measures beyond tax cuts may be necessary to restore foreign investor confidence.