Union Budget FY27: 5 decisions that could shape markets, Kotak Securities says

India's FY27 Union Budget is likely to hinge on five quiet but consequential policy choices that could steer both equity and bond markets in the year ahead, according to Kotak Securities. In a volatile global backdrop marked by geopolitical tensions and trade uncertainty, the brokerage expects the government to prioritise stability over spectacle, slowing the pace of fiscal consolidation, sustaining capital expenditure, and leaning on buoyant non-tax revenues.

Fiscal Consolidation Takes Measured Approach

Kotak Securities projects a deliberate easing in the fiscal consolidation path, with the Centre's gross fiscal deficit expected at 4.3% of GDP in FY27, only marginally lower than the estimated 4.4% in FY26. The brokerage noted that the Centre's debt-to-GDP target of 50±1% by FY31 allows room for a modest annual reduction of 10-20 basis points in the fiscal deficit ratio.

"India's current economic backdrop, shaped by geopolitical tensions and trade uncertainty, warrants a steady, growth-supportive stance in the FY27 Union Budget," the brokerage stated.

Limited Scope for Major Fiscal Stimulus

Following income tax relief and GST rate cuts in FY26, Kotak sees little headroom for large, market-pleasing giveaways. The analysis indicates that committed expenditure accounts for around 60% of revenue expenditure, meaning outright populism would risk straining the fiscal balance. This constraint comes even as several states have pivoted toward cash-transfer schemes.

Capital Expenditure Remains Priority Focus

The third key decision involves maintaining firm focus on capital expenditure, with Kotak projecting capital spending growth of 9% in FY27. The expenditure breakdown shows a sharp emphasis on defence spending, expected to rise 20%, along with continued support through loans for states' capex programmes.

Revenue expenditure is projected to grow at a more restrained 5%, underscoring the Centre's preference for growth-supportive investment over consumption-led stimulus.

Revenue Projections Show Steady Growth

On the revenue side, Kotak forecasts gross tax revenue growth of 9% in FY27, supported by robust performance across multiple categories. The projections are underpinned by 10-10.5% nominal GDP growth, stronger corporate earnings, and moderate wage gains.

Indirect taxes are expected to benefit from strong GST and excise collections, particularly reflecting higher taxes on tobacco. A crucial cushion comes from non-tax revenues, with the RBI's surplus transfer estimated at ₹2.9 trillion in FY27, up from ₹2.7 trillion in FY26, citing continued strength in foreign and domestic income.

Higher Borrowing Could Pressure Bond Markets

The fifth decision involves higher borrowing levels that could unsettle bond markets. Kotak estimates gross government securities borrowing at ₹16.00 trillion in FY27, compared with ₹14.80 trillion in FY26, driven by large redemptions.

The brokerage warned that this increased borrowing could "add pressure across the yield curve," potentially creating challenges for bond market participants.

Taken together, Kotak's analysis presents a Budget that is deliberately understated, seeking to balance growth support with fiscal credibility. For markets, the signals may be subtle rather than dramatic, but the brokerage argues they could still prove decisive in shaping sentiment through FY27.