Fixed-income markets are drawing heightened attention from both retail and institutional investors as Budget 2026 approaches. Elevated bond yields, global rate volatility, and shifting fiscal-monetary dynamics have combined to make bonds an increasingly relevant asset class in portfolio construction. Market participants indicate the upcoming Budget could play a pivotal role in shaping sentiment across government securities, corporate debt, and broader capital markets.

Fiscal Discipline Key for Bond Stability

According to Saurav Ghosh, Co-founder of Jiraaf, investors are closely monitoring the government's commitment to fiscal consolidation. "As we look ahead to Budget 2026, retail and bond investors alike are keenly focused on fiscal consolidation and credible deficit guidance," Ghosh explains. He emphasizes that a disciplined approach toward lower fiscal deficits helps anchor government bond yields and reduces uncertainty in the rate environment.

Stable sovereign yields create cascading positive effects across debt markets. "It creates conditions for Indian corporates to tap the debt markets with greater confidence," Ghosh notes, adding that higher corporate bond issuance can meaningfully boost capital formation and support economic growth, particularly during periods of equity market volatility.

Regarding taxation expectations, Ghosh anticipates limited changes. "Both tax regimes have already seen significant reform over the last 12 months, so the Budget is more likely to focus on clarifications rather than major structural changes," he states.

Global Dynamics vs Domestic Resilience

While global developments continue influencing capital flows, economists argue that India's domestic fundamentals will ultimately guide bond markets. Pranjul Bhandari, Chief India Economist and Strategist at HSBC Global Investment Research, highlights the complex global backdrop affecting Indian markets, including bond index inclusion discussions and shifts in global monetary policy.

"There is a lot going on globally that impacts Indian markets, but we are focusing on India's domestic resilience, which we believe will guide markets once the dust settles," Bhandari observes. She points to strong domestic growth and benign inflation readings as indicators of a favorable economic phase, while acknowledging concerns around insufficient corporate investment and subdued foreign inflows.

Favorable Fiscal-Monetary Mix for Bonds

The current macroeconomic environment appears supportive for fixed-income investments. Bhandari believes the combination of tight fiscal policy and relatively easy monetary conditions could create an optimal balance for asset markets. "This mix should be positive for all asset classes," she explains.

Several factors are already supporting bond markets:

• Higher state government borrowing planned for Q1 FY26 is largely priced in
• Ongoing RBI bond purchases are helping contain yield volatility
• Expectations of fiscal prudence in Budget 2026 could reinforce market confidence
• Bond index inclusion developments may unlock incremental foreign flows

Bhandari emphasizes that bond index inclusion-related developments represent a potential additional tailwind that could unlock incremental foreign flows into Indian debt over the medium term, further strengthening the fixed-income market outlook.

As the government prepares Budget 2026 amid persistent global uncertainty and sustained foreign portfolio outflows, market participants are closely monitoring for signals that could revive investor confidence. Gaurav Bhandari, CEO at Monarch Networth Capital, expects the upcoming Budget to be reform-oriented and explicitly FII-friendly, focusing on improving India's attractiveness as an investment destination.

December Quarter Earnings Outlook

Bhandari anticipates decent but not spectacular performance for the December quarter earnings. The following table summarizes his expectations:

While certain pockets like banks and select industrials may show resilience, overall earnings growth will remain moderate on an aggregate basis.

Budget 2026 Reform Expectations

With foreign investors remaining net sellers for much of the past few years, Bhandari believes the government will introduce measures to stem capital outflows and strengthen long-term investor sentiment. He expects a strong reform-oriented budget with specific focus areas:

• Taxation relief for Foreign Institutional Investors
• Enhanced regulatory clarity
• Policy measures to arrest capital flight
• Initiatives to boost India's investment destination appeal

Given sustained FII outflows over the past 3-4 years, he anticipates the government will actively attempt to enhance India's attractiveness as an investment destination.

Currency and Market Dynamics

Regarding the rupee's recent weakness, Bhandari does not foresee depreciation to ₹100 per USD. His currency outlook includes:

He expects the government and RBI to take strong corrective measures, particularly to boost exports and manage currency volatility, with no cause for panic from an investment standpoint.

Sector Preferences and SIP Flow Impact

Bhandari remains positive on specific sectors for medium-to-long-term portfolios:

PSU Banks: Supported by improving balance sheets, better asset quality, and attractive valuations

Defence: Backed by strong order books, indigenization efforts, and sustained government spending

Domestic SIP flows have been a key stabilizing force for Indian equities, and this trend is expected to continue. Financialization of household savings, rising investor awareness, and long-term wealth creation themes should keep SIP inflows robust and consistent, providing a cushion against intermittent foreign selling.

Growth Outlook and Economic Projections

Despite geopolitical concerns and trade tensions, Bhandari estimates the Indian economy should grow in the range of 7.40-7.60% in the current financial year. Domestic consumption will continue to be the backbone of Indian growth, with India's structural strengths, demographic advantage, and policy continuity providing confidence that growth momentum can be sustained despite global uncertainties.