Indian equity markets are witnessing significant volatility ahead of the Union Budget 2026, as investor focus intensifies on sectors positioned to benefit from sustained government spending and policy continuity. Defence and infrastructure stocks have emerged as leading sectoral preferences, reflecting market expectations for continued public capital expenditure and strategic budget allocations.

Defence Sector Takes Lead in Pre-Budget Positioning

According to a pre-Budget survey of smallcase managers, defence has emerged as the top sectoral bet among market participants. The optimism stems from expectations of higher budget allocations driven by three key factors:

• Indigenisation initiatives promoting domestic manufacturing capabilities
• Military modernisation programs enhancing operational readiness
• Export-led growth strategies expanding India's defence manufacturing footprint

This positioning reflects confidence in the government's continued emphasis on strengthening domestic defence capabilities while reducing import dependence.

Infrastructure Maintains Strong Appeal

Infrastructure follows closely as the second-most favoured sector, underpinned by sustained confidence in the government's development agenda. Market participants expect continued momentum across multiple infrastructure verticals:

The sector's appeal stems from its role in supporting long-term economic growth through sustained capital deployment and job creation.

Capex Themes Dominate Portfolio Strategies

The survey highlighted that market participants continue to favour capital expenditure-led investment themes. Manufacturing has also attracted significant attention, with expectations of continued policy support through production-linked incentive schemes. This preference aligns with the government's focus on structural growth sectors over broad-based fiscal stimulus.

In contrast, consumption and agriculture sectors are expected to benefit from more targeted policy measures rather than comprehensive spending programs, consistent with the administration's emphasis on fiscal discipline.

Market Outlook and Volatility Expectations

While optimism for structural growth sectors remains intact, market participants anticipate short-term volatility around the Budget announcement. This expected turbulence is attributed to event-based positioning and potential policy surprises that typically accompany major fiscal announcements.

However, the consensus view suggests such volatility will likely prove temporary, with markets expected to revert to fundamental drivers including earnings growth, liquidity conditions, and macroeconomic stability in the weeks following the Budget.

Medium-Term Projections Show Confidence

Reflecting underlying confidence in India's equity markets, smallcase managers project the Nifty 50 to close FY26-27 above the 25,000 mark. A significant proportion of respondents forecast levels well beyond 27,500, underscoring a constructive outlook for Indian equities over the medium term.

Macro expectations also remain supportive, with a majority of managers forecasting inflation in the 4-5% range for FY27. This benign inflation outlook reinforces expectations for policy continuity and provides fiscal space for maintaining capital expenditure focus without compromising stability.

"As managers anticipate volatility around the Budget but remain confident about the medium-term trajectory, smallcase continues to offer a structured way for investors to participate in these themes with clarity and discipline," said Vasanth Kamath, Founder & CEO, smallcase.

Investment expert Pankaj Murarka from Renaissance Investment Managers believes the current market volatility ahead of the upcoming budget presents attractive entry points for long-term investors, particularly in banking and consumer sectors. Speaking to ET Now, the Chief Investment Officer shared insights on navigating market conditions characterized by persistent foreign institutional investor (FII) selling and global geopolitical uncertainties.

Market Fundamentals Remain Strong Despite Volatility

Murarka describes recent market movements as creating "a perfect capitulation in mid and smallcap" segments, offering opportunities for patient investors to acquire quality companies at more attractive valuations. Despite near-term nervousness from continuous FII selling and the approaching budget announcement, he emphasized India's fundamental economic resilience as a 7% growth economy with improving earnings prospects.

"After last year's slow earnings growth, we are getting back to a stage where we think the index will deliver approximately 12% earnings growth going into the next year," Murarka noted, adding that valuations have normalized following a 12-month period of market underperformance.

Investment Strategy: Long-term Accumulation Over Short-term Trading

Murarka advised a clear distinction between trading and investing approaches in the current environment. For traders, he recommended caution and staying on the sidelines until clearer market trends emerge. However, for investors with longer time horizons, he suggested using market drawdowns as accumulation opportunities.

"Any sign of these kind of panics or drawdowns that they see in the market, they should go and buy into good companies," Murarka stated, emphasizing the importance of focusing on quality companies during market weakness.

Banking and Consumer Sectors Show Strong Promise

The investment chief highlighted two key sectors offering significant value in the current market environment:

Banking Sector Positioned for Growth

Murarka expressed confidence in banks, citing strong balance sheet quality and early indicators of credit growth recovery. Recent earnings reports from sector leaders have been encouraging, positioning banks favorably for the year ahead. The sector benefits from improved asset quality and emerging signs of credit demand recovery.

Consumer Sector Offers Attractive Valuations

The consumer sector presents compelling opportunities after experiencing two years of underperformance, leading to normalized valuations. Murarka remains optimistic about consumer stocks, pointing to significant government stimulus infused into the economy last year. He anticipates increased rural spending in the forthcoming budget, which could provide additional economic support.

Budget Impact and Strategic Positioning

With the budget approximately ten days away, market participants are exhibiting caution. However, Murarka's analysis suggests that pre-budget uncertainty, combined with normalized valuations and improving earnings growth prospects, creates a favorable risk-reward scenario for disciplined investors.

The combination of structural economic strength, anticipated government spending on rural development, and sector-specific improvements in banking and consumption categories forms the basis of Murarka's constructive medium to long-term outlook on Indian equities. This strategic positioning emphasizes the importance of maintaining focus on fundamental strengths while capitalizing on temporary market dislocations.