Equities Will Remain In A Holding Pattern As Budget Unlikely To Lift Market Ennui

Indian equities are unlikely to find a decisive direction from the 2025-26 Union Budget, as fiscal constraints and global uncertainties keep sentiment subdued. The market will react to headline announcements, but any impact is likely to be short-lived. Liquidity conditions, earnings performance, and external factors will play a bigger role in dictating market movement beyond budget day.

Tight liquidity conditions in the banking system are capping market upside. RBI data show that bank credit growth slowed to 11.5% as of January 10, down from 16.0% a year ago. Systemic liquidity is at its tightest in over a decade, affecting margin financing and reducing credit flow to non-bank finance companies, which play a key role in consumer lending.

Foreign portfolio investors have pulled ₹685 billion from Indian equities so far in 2024-25, while domestic mutual fund inflows into equities remain steady. However, mutual fund assets under management declined 1.7% in December as investors pulled ₹1.27 trillion from debt funds. SEBI’s restrictions on derivative contracts, along with increased securities transaction and capital gains taxes, have also reduced retail participation.

With market valuations still elevated, any earnings disappointment could weigh on sentiment. As of January 25, 1,489 out of 3,014 actively traded stocks were priced above 30 times their earnings. Consensus earnings estimates for Indian equities have fallen 7% since September, yet the Nifty 50 has declined only 10%, keeping valuations stretched. A DSP Mutual Fund report highlighted that only a handful of companies are trading at attractive valuations, reinforcing concerns about market vulnerability. Indian equities also appear expensive relative to other emerging markets, which may divert global capital away from India.

Promoters offloaded ₹1.5 trillion worth of shares in 2023-24, the highest in five years. While not all stake reductions signal trouble, the scale of divestment indicates that insiders view current valuations as rich.

Budget Impact

Despite investor anticipation, the Union Budget is unlikely to drive a sustained market rally. Fiscal consolidation remains the government’s priority, with a target to narrow the deficit to 4.9% in 2024-25 and 4.5% in 2025-26. This leaves little room for large-scale stimulus or tax cuts that could materially shift market sentiment.

Sector-specific measures may trigger stock-specific movements, but a broad-based re-rating is improbable. Tax relief, if any, is expected to be measured, and infrastructure spending may be constrained by fiscal discipline. The budget will provide policy direction, but structural constraints on growth will remain.

Global factors continue to pose risks to Indian equities. The US dollar has strengthened, partly in response to potential trade policy shifts under a Trump administration. A stronger dollar reduces returns for carry trades, making emerging markets like India less attractive to foreign investors. Any tightening of global liquidity could exacerbate outflows.

Geopolitical tensions, including conflicts in Ukraine and disruptions in the Panama Canal, add to uncertainty. While these issues are beyond the control of domestic policy, they influence risk sentiment and capital flows into emerging markets.

Without a clear catalyst, Indian equities will likely remain range-bound. The budget will provide momentary direction, but sustained movement depends on broader macroeconomic trends, liquidity, and earnings growth. Unless the government surprises with an unexpected policy shift, investors should brace for continued stagnation, with stock prices taking cues from global markets and domestic monetary conditions