India’s Budget To Test Mixed Market Cues As Macro Woes Persist

As Indian stocks grapple with a bumpy start to the year and economic growth is tipped southward, domestic investors and already-exiting global funds await Budget 2025, which will be unveiled by Finance Minister Nirmala Sitharaman on Saturday.

Raising disposable income and boosting rural and urban demand will be the top agenda, along with providing an impetus to business and global funds.

Balancing the trilemma of fiscal consolidation, capex-led growth or a boost to consumption and jobs will be tough, according to analysts at CLSA. However, they foresee that India will curtail its capex spend.

As markets tread cautiously, investors will be extra nervous given the consecutive muted earnings by top firms. The government has slashed economic growth projections for the current fiscal. While the pullback was more than expected, flash data indicates that service activity in 2025 has been dull.

A rejig in customs duty on a range of imported items, new Income-tax Bill, and tweaking of the new tax regime for individuals by reducing tax rates for income up to Rs 10 lakh could be on the anvil, NDTV Profit has learnt so far.

Investment houses and brokerages across the spectrum see muted growth for stocks this year, which are yet to revive after falling into correction zone. Given the volatile macro situation and geopolitical churning, market veterans advise caution. Though US President Donald Trump has gone soft on his tariff plans, mixed signals continue to keep traders on edge.

The domestic currency is facing pressures amid outflows in stocks and bonds with the Reserve Bank of India taking a break from aggressive dollar sales. The rupee hit an all-time of 86.69 on Jan 13.

Disappointments from quarterly earnings and the threat of further downgrades continue to hurt investor sentiment. The topline growth in the third quarter has been muted so far and profit growth is sluggish at best, leading to a cut in earnings estimate for fiscal 2025.

Markets have been in a corrective phase for the past few months, with no clear signs of recovery yet, according to Ruchit Jain, head of technical research at Motilal Oswal. "Until there are signs of a reversal, we recommend traders remain cautious ahead of the budget event."

Once the current price-wise corrective phase concludes, the markets may enter a period of time-wise correction or consolidation before initiating the next upward rally, Jain said.

The market is likely to react positively if the Budget meets or exceeds expectations, particularly in terms of fiscal prudence, tax cuts, and infrastructure spending, Jain said.

However, market participants remain optimistic in the long run and advise participants to buy at every opportunity.

"Stay with top quality stock," says Gautam Shah of Goldilocks Premium Research. He reinforced the need for investors to focus on quality stocks and sectors that are poised for a rebound.

Key expectations are typically centred around policies that could drive economic growth and enhance corporate profitability, Jain said. Tax reforms, fiscal discipline, capital market reforms and infrastructure spending will be the key monitorables, Jain said.

Trump's protectionist leanings on trade have roiled the outlook on exports globally. India enjoys a trade surplus with the US and is the top beneficiary of immigration policies that Trump has criticised. The Budget is expected to address these issues on the trade front — further aggravated by Chinese industrial overcapacity.

With the dollar surging and Wall Street seeing new highs, global funds have resumed their selling from once-growth-fuelled Indian stocks. Foreign investors have offloaded over Rs 91,000 crore since December 2024— after a record exodus from September to November.

Domestic institutions and retail investors continue to back local stocks as Indian households shift from traditional to financial investment options. Since December 2024, local institutions have bought stocks worth Rs 1 lakh crore, according to data from NSE.

The tug-of-war between global funds and domestic institutions has pushed the benchmark indices—NSE Nifty and BSE Sensex—to fall 13.1% and 12.4% from their September peak, respectively.

The worst hit were the Nifty Next 50 stocks, which traded nearly 20% lower from their highs. The broader market also took a heavy beating, with small-cap stocks seeing their worst-ever start to the year.

The so-called 'Modi stocks' — an index of 54 stocks coined by CLSA — are expected to remain gloomy as the Budget may remain firm on fiscal deficit target.

The underperformance of the 'Modi' basket of PSU and capex stocks may continue, according to CLSA. Coming after four years of 25%-40% year-on-year growth, the capex-linked stocks may be seen as a disappointment versus the high expectations, it said.

Railways: The Budget will likely sustain the healthy growth in Railway capital expenditure with priority on passenger mobility and safety systems, according to industry executives. Budget allocation for the Indian Railways has seen a steady rise over the years, with Rs 1.59 lakh crore allocated in fiscal 2023, marking a 35.5% growth, followed by Rs 2.4 lakh crore the next year, a significant 50.9% increase. For FY25, the allocation stands at Rs 2.52 lakh crore, reflecting a moderate 5.8% growth.

Housing: Amid a dip in GDP growth, the government could initiate measures to boost construction activity to foster job creation in this labour-intensive segment. Last year, affordable housing budget outlay rose 56% to Rs 84,700 crore. The sector now expects support to homebuyers by tweaking taxation and broadening the definition of affordable housing.

Defence: The budget is expected to focus heavily on the defence sector, with increased capital allocation, emphasis on indigenisation, domestic procurement, and initiatives to boost defence exports. Larger defence programmes are likely to drive higher orders in 2025. India's defence spending has steadily risen, with Rs 6.21 lakh crore allocated in FY25, marking an 18% growth from Rs 5.94 lakh crore in FY24, itself higher by 13%.