New Delhi: Following the announcement of the Union Budget 2025-26, market sentiment is expected to stabilize, shifting focus back to earnings reports and the upcoming Reserve Bank of India (RBI) Monetary Policy Committee (MPC) meeting scheduled for February 7. The meeting is anticipated to bring crucial decisions on key interest rates, the Cash Reserve Ratio (CRR), and the Reverse Repo Rate, with experts predicting a 25 basis points rate cut to further ease market liquidity.
This will be the first MPC policy decision under the leadership of RBI Governor Sanjay Malhotra, making the meeting even more significant for market sentiment. According to a report by Motilal Oswal Financial Services Ltd. (MOFSL), the Union Budget signals a shift in fiscal policy, moving away from capital expenditure (capex) and emphasizing consumption and savings while continuing to prioritize fiscal deficit consolidation.
The 2025-26 Budget marks a departure from previous years by focusing on stimulating consumption, in response to weak economic sentiment, instead of primarily boosting capex. The fiscal policy demonstrates flexibility, aimed at encouraging consumption without resorting to populist measures. The report suggests that the fiscal deficit target for FY26 is set at 4.4%, which is 10 basis points lower than the glide path requirement, benefiting the bond market and strengthening India’s position with sovereign rating agencies.
The government's approach is seen as paving the way for monetary accommodation, potentially providing space for the RBI to implement further rate cuts. The subsidy allocation remains flat for the third consecutive year, reducing to 8% of total expenditure in FY26 from 14% in FY23.
In addition, the Budget focuses on improving the ease of doing business by enhancing self-regulation/self-assessment mechanisms and simplifying income tax provisions, reducing compliance burdens across various laws.
As the market digests the Budget announcements, it is expected to turn its attention to corporate earnings and the upcoming RBI MPC meeting, with earnings growth expectations moderated. The Nifty is projected to grow 5%/16% in FY25/FY26, with large-cap stocks preferred over mid-caps and small-caps. The Nifty is currently trading at 19.9 times on a one-year forward basis, while the Nifty Mid-cap and Small-cap are trading at premiums.
The market's focus will remain on whether the RBI will adjust interest rates in response to the shifting fiscal policies and market conditions.
With IANS inputs