The Indian stock market benchmark indices, Sensex and Nifty 50, crashed over a percent each on Monday amid selling across the board. The recent downturn in the markets can be attributed to a combination of factors, including weak corporate earnings, elevated valuations, and sustained foreign institutional investor (FII) outflows.
A critical factor influencing market sentiment in the near term is the upcoming Union Budget 2025, scheduled to be presented on February 1, 2025. However, market expectations remain subdued, reflecting a cautious outlook ahead of the Budget announcement.
According to Seshadri Sen, Head of Research and Strategist at Emkay Global Financial Services, the Budget 2025 is unlikely to feature a countercyclical stimulus, staying aligned with the government’s fiscal consolidation goals.
Sen emphasizes that the heavy lifting to support growth will likely stem from relaxed lending guidelines and monetary easing later in the year. Sector-specific adjustments could, however, create targeted opportunities for stock market investors.
Fiscal Consolidation: A Softer Impact
Sen highlights the milder fiscal compression expected in FY26. The fiscal deficit target of 4.5% requires a consolidation of just 20 basis points (bps), a sharp contrast to the 90 bps adjustment in FY25 that weighed heavily on growth. While falling tax buoyancy remains a concern, the government is not expected to implement significant expenditure cuts, which bodes well for a mild recovery in growth in FY26.
Capex Growth: Peaking but Stable
After a stellar 31% compound annual growth rate (CAGR) in central government capital expenditure (capex) during FY21-24, growth is expected to plateau. Modest capex expansion in FY26 is likely to align with nominal GDP growth. Though a 10% shortfall in FY25 offers a low base for FY26, long-term capex growth is expected to normalize.
“Some pockets of infra growth like power are relatively unaffected, as market financing plays a more important role than direct central government funding,” Sen said in a note.
Stock Market Strategy
Sen projects a stable tax regime with minimal changes. Key areas to monitor include the rollout of the new direct tax code, which may negatively impact the insurance sector, and progress on the Production-Linked Incentive (PLI) schemes, potentially benefiting EMS and EV manufacturers. Changes in gold customs duty could weigh on jewelry stocks, while LPG subsidy payouts might support oil marketing companies (OMCs).
On the broader market, Sen remains cautious, with an Nifty target implying an 8% upside in 2025. The first quarter could see heightened volatility due to sustained foreign portfolio investor (FPI) outflows and weak earnings. However, a rebound in discretionary consumption, driven by improved credit availability and a hiring recovery in the latter half of the year, could provide tailwinds.
Emkay Global remains overweight on Consumer Discretionary and Healthcare while advising caution on Financials and Staples. For investors, the focus should remain on navigating short-term volatility while positioning for long-term sectoral opportunities.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.