Union Budget 2026, stock market: UBS expectations for defence, railways, road sectors

In its Union Budget 2026 preview, foreign brokerage UBS said a conservative fiscal path should reassure stock and bond markets on yields and equity valuations. For equities, UBS said the choices between higher capex against revenue expenditure could have sectoral implications – in particular, defence capex will likely be keenly watched.

"While changes to personal taxation slabs are not expected, there are specific taxation actions we would watch out for: 1) the alignment of tax treatment on bank deposits vs other debt products; and 2) tweaks to securities transaction taxes," it said.

The UBS EM strategy team suggested 'underweight' on India and believes stock valuations remain high in the context of growth expectations, not meaningfully different from the rest of emerging markets.

On the bonds market, UBS said the 10-year bond yields’ negligible reaction to RBI’s 125 basis points rate cuts, Rs 6 lakh crore of open market operations (OMO) purchases, depressed CPI inflation and muted domestic demand in 2025 is, in its view, reflective of the bond market's demand-supply imbalances.

In its 2026 outlook, it noted the elongation of bond issuances’ maturity and larger State Development Loans (SDL)  issuances were the real culprit. In that context, UBS said a modest fiscal consolidation is unlikely to be a market-moving event, but fiscal slippage could pressure higher.

"We expect 10-year yields to trade in a 6.5-6.75 per cent range in the near term, while forecasting 10y IGB to reach 6.60 per cent by end-2026. In swaps, absent new catalysts, we think 5-year OIS holds in a 5.70-5.90 per cent range, although the front end could be volatile amidst frictional liquidity tightening into the fiscal year-end," it said.

The Budget will be presented by the Finance Minister Nirmala Sitharaman on February 1, Sunday.

Sectors to watch in Budget 2026
Within capex, UBS anticipated a continued emphasis on infrastructure (including mobility upgrades), with a notable thrust towards defence, while maintaining stable-to-slightly-increased allocations for roads & highways and railways.

In railways, its industrials team expects higher allocations towards rolling stock. In defence, the team expects a pick-up in budgeted expenditure to align with strong DAC (Defence Acquisition Council) approvals over the past two years (2024-25 clearances of Rs 8.1 lakh crore, 2-3 times of 2022-24).

"Given India’s relative under-representation in the global AI landscape, we expect the Budget to articulate a stronger AI narrative and step up funding for digital infrastructure – particularly data centres, semiconductors, electronics and R&D," it said.

Alongside AI, with the government’s ambition of achieving rare earth self-reliance, UBS expects the mining sector to receive incremental incentives.

Many investors UBS spoke to expects the Budget 2026 to carry forward last year’s consumption push but given the recent GST rate rationalisation and limited fiscal space, it does not expect anything significant.