Railway stocks have experienced a remarkable surge ahead of the Union Budget 2026, with investors showing strong optimism about increased government spending on railway infrastructure. The budget, to be presented by Union Finance Minister Nirmala Sitharaman on February 1, 2026, is expected to significantly impact investment flows in the railway sector.

Expected Capital Expenditure Increase

Analysts anticipate a substantial boost in railway capital allocation for FY27. According to Pranay Aggarwal, Director and CEO of Stoxkart, the government is expected to increase railway capex by approximately 10% in the upcoming budget.

The anticipated increase builds upon the ₹2.65 trillion allocation to the Ministry of Railways in Union Budget 2025-26, which focused on infrastructure development, modernisation, and electrification initiatives.

Market Performance and Stock Movements

Following the rail fare hike in December 2025 and budget expectations, railway stocks have delivered impressive returns over recent trading sessions. The sector has witnessed broad-based gains across multiple companies.

Key Investment Areas and Beneficiaries

The expected capex increase is likely to generate healthy order inflows across multiple railway segments. According to market analysis, the government may prioritise allocation towards the Kavach automatic train protection system, production of advanced coaches, and the Namo Bharat Rapid Rail service. The increased spending should benefit EPC contractors, safety system providers, track work specialists, electrification companies, station redevelopment firms, and rolling stock manufacturers.

Stocks to Watch

Indian Railway Catering & Tourism Corporation (IRCTC)

Trading at ₹613.90, IRCTC remains a strong contender with improved digital ticketing and non-convenience fee income. The company plans to launch a unified travel portal and establish a payment aggregation business.

Rail Vikas Nigam Ltd (RVNL)

As the construction arm of Indian Railways, RVNL has secured multiple modernisation contracts. The company is well-positioned to benefit from increased infrastructure spending.

IRCON International Ltd

With strong government backing and a diverse order book, IRCON has experienced bullish activity in recent weeks, reflecting market confidence in its growth prospects.

RailTel Corporation of India Ltd

Incorporated in 2000, RailTel operates as one of India's largest neutral telecom infrastructure providers, with experts recommending the stock for long-term investment potential.

The railway sector's performance ahead of Budget 2026 reflects strong investor confidence in the government's continued focus on infrastructure development and modernisation initiatives.

Pratik Gupta, CEO and Co-Head at Kotak Institutional Equities, has set modest expectations for the upcoming Union Budget 2026, citing limited government room for significant fiscal stimulus measures. Speaking about market outlook and budget expectations, Gupta emphasized that the focus may shift toward what he terms "governance stimulus" rather than traditional spending measures.

Budget 2026 Expectations and Reform Focus

Gupta outlined his expectations for the government's approach in the upcoming budget, highlighting structural reforms over direct stimulus measures.

According to Gupta, investors should "watch out for steps which would be rupee supportive," including specific measures designed to attract foreign direct investment and enhance portfolio flows into the country.

Market Risks and Global Factors

Gupta identified several key risk factors currently impacting Indian equity markets. Global bond yields emerged as a primary concern, with rising yields worldwide creating uncertainty for emerging market investments. He specifically pointed to the sharp rise in Japanese bond yields as a recent warning sign for broader market stability.

Foreign institutional investor outflows represent another significant challenge, with approximately ₹3.00 billion in selling recorded during the first 20 days of January. Gupta noted that India currently lacks the high-growth profile or attractive valuations that would draw international capital, particularly compared to markets with significant artificial intelligence-linked stocks in the US and parts of Asia.

IPO Market and Deal Pipeline

Despite challenging market conditions, the initial public offering landscape remains active with a robust pipeline of upcoming issues.

Gupta emphasized that domestic institutional investors, particularly mutual funds and insurance companies, continue to provide the primary source of demand for new issues. While valuation expectations have moderated and local investors are negotiating more aggressively on pricing, most companies are proceeding with their capital market plans without major delays.

Market Outlook and Investment Strategy

Regarding market positioning and investment approach, Gupta advised a cautious stance given current global uncertainties. He expects continued volatility over the coming months, driven primarily by uncertainty surrounding US trade policy and tariff implementations.

India's economic fundamentals remain relatively stable, with inflation under control and growth expectations in the 6.50%-7.00% range. However, Gupta stressed the importance of capital preservation, stating "protect your capital first" until greater clarity emerges on global policy directions.

Gupta's assessment suggests that while large-cap stocks have corrected to reasonable levels, mid-cap and small-cap segments may face additional pressure due to elevated valuations and recent earnings downgrades across various sectors.