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Informist, Sunday, Feb. 1, 2026

 

By Anshul Choudhary

 

MUMBAI - The absence of any major boost to the economy in the Union Budget for the financial year 2026-27 (Apr-Mar) is expected to limit returns from the equity market this year. Some analysts expect only single-digit returns from the headline indices in 2026. In a more near-term concern, the sharp rise in securities transaction tax on futures and options trades has hit sentiment and may result in a further fall in equities when most foreign investors return for trading Monday.

 

Market participants sold equities in the special session organised Sunday because the Budget was to be presented. The benchmark indices slumped 2?ch with the Nifty 50 ending below its key support level at 24825.45 points. The broader market fell more with the small-cap indices down nearly 3%.

 

Analysts said the Budget was largely in line with expectations, which were low to begin with. "Budget maintained status quo... taxation benefits were already announced last year, focus on sectors was similar to last year," Dharmesh Kant, head of research at Cholamandalam Securities, said.

 

Analysts were positive about the government's plan to keep lowering its fiscal deficit, the higher outlay for capital expenditure, and the announcements for the infrastructure sector. However, they advised investors to keep expectations of returns in check as the Budget announcements will only help the economy in the longer run and may not significantly change the course of earnings growth for Indian companies, which have been struggling with weak growth for almost two years.

 

"From a macro-perspective, everything was there (in the Budget)... But, your PE (price-to-earnings ratio of Nifty 50) is justified," Awanish Chandra, executive director of institutional equities at SMIFS Ltd., said. He expects the Nifty 50 to rise to 27500-28000 points this year, which would translate to a return of only 5-7% in 2026. Echoing this, Cholamandalam's Kant said the market is likely to move in a range for 3-4 months, until India and the US sign a trade deal.

 

"India remains a strong market to pick stocks, but things are changing on the global front, which is a bigger issue," Chandra of SMIFS said. Market participants are eagerly waiting for the trade deal, which is expected to result in the 50% tariff on Indian goods exports to the US being lowered. The trade deal, which was expected to be signed last year, has already been delayed and a further delay will put equities at a risk as investors may begin to lose patience, analysts said.

 

The government estimates India's nominal GDP will grow 10% in FY27. This suggests top companies may also not be able to grow their earnings significantly as these companies usually tend to post earnings growth that is a few percentage points better than the nominal GDP growth, analysts said. "Our estimates suggest a 12-13% rise in earnings for FY27, but earnings growth needs to be 15%-plus for stronger returns," Kant said of the companies in the Nifty 50 index.

 

Returns from the equity market have come down over two years as stock valuations remain high. The Nifty 50 was up over 10% in 2025 and 9% in 2024--half of the 20% rise seen in 2023.

 

Analysts lauded the government's plan to push its capital expenditure to a record high level, but they were concerned that it may miss the target. The government plans to incur capital expenditure of INR 12.2 trillion in FY27, an increase of 9% on year. Brokerages had expected the outlay to rise 4-13%. But even the 9% increase seems to have disappointed some as shares of companies dependent on government orders fell. The Nifty Infrastructure index and the BSE Capital Goods index closed 2.5-3% lower.

 

Analysts were worried about higher-than-expected gross borrowings, which are likely to drive up bond yields and hit profits of banks. The Budget pegs the government's FY27 gross market borrowing at INR 17.2 trillion--significantly higher than INR 16.30 trillion expected by economists and market participants in an Informist poll. The Nifty PSU Bank was down nearly 6% Sunday and the Nifty Bank closed 2% lower.

 

NEAR-TERM STT IMPACT

The sharp rise in securities transaction tax is likely to impact market sentiment for a while and hit volumes from algorithm and high-frequency traders, analysts said. These traders work on narrow margins and the increase in the tax is most likely to affect them significantly, they said. The Budget raised the securities transaction tax on futures transactions to 0.05% from 0.02% and on options premiums and exercise of options to 0.15% from, respectively, 0.1% and 0.125%.

 

"They (the tax increases) make many high-frequency and arbitrage trades unviable, which will squeeze market liquidity and leverage in the short term," Raamdeo Agrawal, chairman of Motilal Oswal Financial Services Ltd., said in a statement. However, most analysts do not expect the tax to hit volumes in the futures and options market beyond a few months. "Call it greed... but unless there is a bar on margin or one finds another asset that makes higher returns, people will come back," Chandra of SMIFS said.

 

Fow now, analysts expect the Nifty 50 to fall more in the coming weeks as disappointment around the Budget pulled the Nifty 50 below its key support level Sunday. Technical analysts expect the Nifty 50 to fall to 24500-24300 points Monday, indicating a fall of 2% more.

 

"We will be opting for sell on rise for the first 15 days," Brijesh Ail, assistant vice-president of research at Shriram Wealth, said. While the securities transaction tax is a negative for the markets, several analysts expect the indices to eventually recover from the lows they may touch over the next few days. The continuing domestic inflows into equities through mutual funds will help to limit any fall, analysts said.  End

 

Edited by Rajeev Pai

 

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