'Tweaks to capital gains tax': What could sway market sentiment in Budget 2026?

In its Budget 2026 preview note, Nuvama Institutional Equities said any acceleration in capital expenditure would be welcomed but may be insufficient to arrest the earnings downgrade cycle, as margins are poised for mean reversion and external headwinds loom large. It said a defensive bias is warranted in the absence of a stronger growth impulse. The brokerage added that any tweaks to capital gains taxes could sway market sentiment in the near term.

"FY27 budget is likely to be somewhat growth supportive – a welcome change. However, the recovery is still likely to be modest and unlikely to stall the earnings downgrade cycle. We maintain that for FY27, margin mean reversion rather than top line remains key risk to earnings," it said.

The Budget 2026-27 will be presented by Finance Minister Nirmala Sitharaman on February 1, 2026.

Defensive bias

Nuvama said the Budget 2026 is unlikely to decisively support any particular sector. Its key overweight sectors are telecom, internet, IT, consumer, cement and chemicals. The brokerage is underweight on BFSI, industrials, autos and power sectors. Overall, Nuvama maintained that 2026 is likely to be a volatile year with potential resets on margins and valuations.

It said the Indian economy is bottoming out, but growth impulses are still weak. Tax cuts in 2025, it said, are aiding select pockets of consumption. That said the anticipated spending cuts to meet FY26 gross fiscal deficit (GFD) target of 4.4 per cent of GDP would limit gains in the broader economy, Nuvama said.

"For FY27, monetary easing done so far must be complemented with fiscal support to enhance its effectiveness. Hence, while fiscal expansion is unlikely, we forecast the FM would refrain from further consolidation in FY27. Gross tax revenue may increase 8 per cent in FY27, enabling capex and development spending to grow in low/mid-teens versus single-digit in FY26," Nuvama said.

Big stimulus unlikely

For a bigger growth push, the FM Nirmala Sitharaman has to either rely on large disinvestments or nudge PSUs to expand capex, Nuvama said.

A big stimulus is unlikely as the exchequer remains committed to reducing the debt-to-GDP ratio by 1 per cent annually until FY31, implying a continued focus on deleveraging, it said.

Beyond fiscal math, the FM may announce deregulation measures and credit-guarantee schemes to push growth, it suggested.