Union Budget 2025: 5 key factors that may influence stock market movement

Financial Minister Nirmal Sitharaman is set to present the union budget for the year 2025-26 on Saturday, February 1, 2025 and the stock market shall be looking at certain key factors that will drive Dalal Street in the coming financial year. However, the pre-budget build-up has added to the strong momentum of Dalal Street. Here are the key factors that will be the market participant shall be watching on the budget day for long term:
 

Fiscal Prudence

Fiscal pressures and historically low real interest rates have caused a rapid decline in the value of certain currencies relative to others. Additionally, borrowing costs for sovereigns are increasing as financial markets reassess inflation prospects, policy rates, and fiscal discipline.

Over the past few years, the government has mostly stuck to fiscal rectitude and a glide path on fiscal deficit – with the economy witnessing a strong phase. However, given the current tactical economic weakness, it will not be too surprising if the FM considers a modest countercyclical fiscal overstretch, said Motilal Oswal Financial Services.

"FY25 fiscal deficit is likely to be lower at 4.8 per cent versus the budgeted 4.9 per cent. This slack may also help to provide some headroom for the FY26 Union Budget," it said.

Capex

The market shall be looking at the capital expenditure (capex) announcement by the FM as she announced a mega capex of Rs 11.1 lakh crore in her previous budget speech. Any substantial increase in the capex numbers may lift the mood of the markets and select sectors.

"We believe that any allocation above Rs 11 lakh crore for capex, backed by convincing commentary, could positively surprise the market. Also, after a series of promises for freebies across multiple state elections, market participants are concerned that FM may tilt more towards easy handouts," Motilal Oswal added.

Defence, infra and railways

Specific in the capex allocation, stock markets shall be looking at the allocation for the defence, infrastructure and railways sectors, which drive the economy. The increased allocation in these key sectors shall push the economic growth in the new fiscal year.

The focus will be on how the sectoral allocation of capex pans out, said Emkay Global Financial Services. "Some pockets of infra growth like power are relatively unaffected, as market financing plays a more important role than direct central government funding," it said.

GDP Growth

India’s real GDP growth is revised down to 6.4 per cent, on account of lower growth in capital and investment expenditure. One of the key reasons for this slowdown is the unexpected contraction in government's capital expenditure. Consultancy firm EY India projects FY26 fiscal deficit at 4.4 per cent of GDP.

"Central government capex growth has peaked, and we expect modest growth from here, largely tracking nominal GDP. The good news is that the 10 per cent expected miss in FY25 sets a low base for FY26 - but beyond that, expect muted growth," said Emkay.

Push on exports, consumption.

The market will also be looking at the government's focus on the exports from India to cater the uneven balance of trade. The imports of the majority of India's energy needs and China plus one theme may prompt the government to push for exports in the world. Also, the government may focus on pushing consumption.

"Budget focus is unlikely to shift materially to consumption. The Union Budget is set to be framed in the backdrop of sluggish domestic demand and elevated global uncertainty under the cloud of Trumponomics.  While we expect modest measures for consumption," said Elara Capital.