Morgan Stanley constructive on Indian stocks post Budget 2026, prefers 3 themes

Following the Union Budget 2026, Morgan Stanley said it remained constructive on Indian equities and is overweight on financials, consumer discretionary and industrials. The Budget balanced debt-to-GDP reduction with slow fiscal consolidation and support for growth through both cyclical and structural measures, the foreign brokerage said.

"One potential dampener for stock market is the increase in transaction tax in derivatives, which will likely reduce leverage and also affect trading volumes and price discovery, especially in the short run," it said.

Morgan Stanley said the early mention of “semiconductors” in the Budget speech signals a clear shift in the government’s priorities, highlighting India’s push into AI, advanced manufacturing, and strategic sectors. The brokerage expects this, along with likely boosts to capital expenditure, services sector growth, slightly lower-than-expected fiscal consolidation, and increased demand for equities through buybacks, to support earnings in FY27. 

Tax clarity for IT services, a 20-year tax break for data centers, and incentives for energy, semiconductors, electronics, and critical minerals underscore the government’s focus on strengthening India’s position in emerging technologies, with progress on large language models expected soon.

On capital expenditure, Morgan Stanley noted that the government raised its FY27 capex growth estimate to 12 per cent from -1 per cent, with overall spending, including public enterprises, projected to rise 14 per cent. Priorities include defense, high-speed rail, waterways, select dedicated freight corridors, and urbanization, alongside targeted incentives for sectors such as chemicals, capital goods, biopharma, textiles, and sports goods. Land monetization by central public sector companies could provide new funding, while measures to improve corporate and municipal bond markets aim to increase resource flows. Adjustments to import duty structures and tax simplifications are expected to improve the ease of doing business.

The brokerage highlighted potential gains in the services sector from new safe harbour rules and accelerated advance pricing agreements, supporting global capability centers, tourism, and medical tourism. Fiscal consolidation came in slightly lower than expected, at 4.3 per cent versus 4.2 per cent, offering marginal support to earnings growth.

Morgan Stanley said reforms to boost capital market flows, including raising limits for non-residents from 10 per cent to 24 per cent and lowering buyback taxes from dividend to capital gains rates, could increase demand for equities. While corporate India paid around Rs 5 lakh crore in dividends over the trailing 12 months, buybacks fell from Rs 50,000 crore in FY24 to Rs 19,000 crore, a gap that could now be filled. 

The brokerage cautioned that higher transaction taxes on derivatives may reduce leverage, trading volumes, and price discovery in the short term, but retained a constructive medium-term view, expecting high-teen returns driven by earnings recovery.