Budget 2026: Bond market vs equity market expectations

Union Budget 2026-27: Investors Await Fiscal Prudence, Growth Measures

With barely a fortnight left for the Union Budget 2026-27, investors are keenly watching its outcome amidst global and domestic headwinds.

Globally, increasing geopolitical tensions, trade wars, foreign portfolio investors (FPI) sell-out, and slowing global growth are some of the serious concerns. Domestically, a slowdown in net foreign direct investment (FDI), deceleration in merchandise exports, rupee depreciation, and reviving domestic consumption are far more challenging headwinds.

Expectations from the Budget

Investors are expecting the Budget to align bond and equity interests, revive FPI inflows, support earnings, and sustain India's macro stability through disciplined deficits and reforms. On the other hand, the equity market is keen on pro-growth fiscal measures, policy initiatives to attract more FPI/FDI inflows, higher public investment, lower market borrowing, manageable fiscal deficit, a low tax regime, and ease of doing business.

Bond Market vs Equity Market Expectations

• The bond market is prioritizing a disinflationary environment, stronger currency, healthy fiscal deficit, borrowing trajectories, reduced revenue deficit, and moderate growth of public debt.
• The equity market is keen on pro-growth fiscal measures, policy initiatives to attract more FPI/FDI inflows, higher public investment, lower market borrowing, manageable fiscal deficit, a low tax regime, and ease of doing business.

Despite differing risk appetites, the interests of bond and equity investors converge at the macro level. Fiscal prudence, tax relief, and growth measures can indirectly support the equity market, too. For instance, a liberalized regime to attract more FPI/FDI inflows has equal bearing on both segments.

Key Factors to Evaluate the Budget

• India Inc's capital expenditure plan, which is a significant factor for long-term equity investors.
• A liberalized regime to attract more FPI/FDI inflows, which has equal bearing on both segments.
• Corporate tax cut, reduction in Capital Gains Tax and other levies related to capital markets, and Income-Tax relief.
• GST relief, which aids corporate earnings growth.

A significant earnings growth is essential for domestic equities to justify its high valuation, compared to other emerging markets, and facilitate an FPI comeback. The FPIs' return will be a major boost to the debt market, too.

Challenges Ahead

• The US Fed rate cut and the subsequent repo rate reduction by the RBI, which fall outside the Union Budget's purview.
• Rupee depreciation, which is a serious concern for debt investors.

High frequency macro indicators are favoring a rate reduction, but the solution to rupee depreciation lies in a comprehensive trade agreement with the US, which is a fiscal measure that involves high-level political call.