Union Finance Minister Nirmala Sitharaman will present the Union Budget for the financial year 2026-27 on February 1, 2026. The government remains firmly on track to achieve its fiscal deficit target of 4.4 percent of GDP for the current year. This commitment persists despite challenges from lower nominal GDP growth and elevated capital expenditure spending.
Morgan Stanley Projects Gradual Fiscal Consolidation
Global investment bank Morgan Stanley anticipates India's fiscal consolidation will continue into FY27. However, the pace is expected to slow down. The central government will likely set the fiscal deficit target at 4.2 percent of GDP for FY27. This compares to the targeted 4.4 percent for FY26.
This projected 0.2 percentage point reduction would represent the shallowest pace of consolidation since FY23. Despite the slower speed, the move remains consistent with the government's established medium-term roadmap for debt reduction.
Debt Reduction Path and Budget Themes
A fiscal deficit of 4.2 percent in FY27 would help lower the central government's debt burden. Morgan Stanley estimates debt could decline to around 55.1 percent of GDP in FY27, down from an estimated 56.1 percent in FY26.
Over the medium term, the firm expects the government to pursue a gradual consolidation strategy. The stated goal is to reduce the debt-to-GDP ratio to approximately 50 percent, plus or minus one percentage point, by the financial year 2031.
The upcoming Union Budget is expected to focus on three broad themes according to the brokerage.
- Sustained capital expenditure to support job creation.
- Targeted spending in the social sector.
- A renewed push for structural reforms.
Revenue Outlook and Market Strategy
A pickup in nominal GDP growth is likely to boost tax buoyancy and improve revenue collections in FY27. This improved revenue position would give the government more room to prioritize capital expenditure and social infrastructure spending. It can do this while still continuing its fiscal consolidation efforts.
Equity Market Perspective
Morgan Stanley notes that the budget's direct impact on overall market performance has diminished over the years. However, market movements still depend heavily on pre-budget expectations and sentiment.
With many investors approaching this budget with a degree of scepticism, the firm sees potential for both volatility and positive surprises in the post-budget period. This assessment is based on historical patterns.
For equity investors, key factors to watch will include:
- The exact extent of fiscal consolidation announced.
- The scale and specific composition of capital expenditure.
- Any sector-specific policy measures introduced.
Capital market reforms aimed at reviving foreign portfolio investment inflows will also be monitored closely. Morgan Stanley maintains an overweight stance on financials, consumer discretionary stocks, and industrial companies.
Macro and Fixed Income Outlook
From a macro and fixed income perspective, Morgan Stanley expects net government securities (G-sec) issuance to remain broadly stable. The estimate for FY27 is around ₹11.6 lakh crore, marginally higher than the ₹11.5 lakh crore estimated for FY26.
However, gross G-sec issuance could rise to about ₹15.8 lakh crore due to higher redemptions of existing bonds. The firm's issuance estimates sit at the lower end of general market expectations. If realized, this could support a temporary rally in government bond prices.
The brokerage notes that in the current fiscal year, FY26, G-sec supply was concentrated in specific tenors. These include the 5-year, 10-year, 15-year, and 40-year bonds. The Reserve Bank of India absorbed a larger share of this supply.
For strategy, Morgan Stanley prefers paying 5-year INR overnight indexed swaps on price dips. The firm maintains a neutral stance on the Indian rupee.
