India's Market Outlook: Fiscal Prudence and US Trade Deal Fuel Bull Run Prospects
Amidst global technological turbulence and artificial intelligence disruption, India's financial markets have discovered substantial shelter under a fiscally responsible union budget and a groundbreaking trade agreement with the United States. While volatility remains an ever-present factor, strategic infrastructure investments and calculated sectoral pivots are carving a pathway toward a more resilient and robust equity market environment.
The Fiscal Foundation: Budget 2026-27
The union budget for the fiscal year 2026-27 has successfully balanced public investment-led growth objectives with steadfast fiscal consolidation, deliberately avoiding populist policy temptations. The government has set the fiscal deficit target for FY27 at 4.3% of gross domestic product, a slight improvement from the previous year's 4.4%, while simultaneously leveraging capital expenditure to stimulate economic expansion.
Capital spending allocation for FY27 has been elevated to ₹12.22 trillion, representing approximately 3.1% of GDP, with pronounced emphasis on transportation infrastructure, defense modernization, and energy sector development. This substantial public capital expenditure is anticipated to sustain economic momentum and catalyze private investment, a crucial consideration as corporate earnings face intensified scrutiny.
Infrastructure spending continues to dominate budgetary priorities, with road and highway allocations increasing to ₹3.10 trillion—an 8% rise over last year's revised estimates—including renewed emphasis on rural road development. Railways have received approximately ₹2.9 trillion, marking a 10% year-on-year increase, accompanied by announcements of seven new rail corridors designed to alleviate congestion and enhance network efficiency.
Defense capital outlay has been raised significantly to ₹2.19 trillion from ₹1.86 trillion, supporting both modernization initiatives and strengthening domestic defense manufacturing capabilities. Additionally, the budget allocates ₹1.85 trillion in interest-free long-term loans to states for capital expenditure in 2026-27, facilitating decentralized infrastructure execution.
Strategic Sector Emphasis and STT Adjustments
Beyond traditional infrastructure, the budget demonstrates sharpened focus on strategic and emerging sectors. The government has introduced Semiconductor Mission 2.0 with a ₹1,000 crore allocation while dramatically expanding incentives for electronics component manufacturing to ₹40,000 crore from the previous ₹22,900 crore. The India AI Mission receives ₹1,000 crore to support computational and data infrastructure development.
One budgetary element that generated unequivocally negative market reaction was the increase in securities transaction tax on futures to 0.05% from 0.02% and on options transactions to 0.15% from 0.1%. Market experts interpret this adjustment as a regulatory signal aimed at curbing retail investor speculation in derivatives markets, where studies indicate approximately 91% of retail traders incur losses.
The US Trade Deal: A Sentiment Catalyst
The announcement of the India-US trade agreement has emerged as a powerful sentiment booster for Dalal Street, eliminating a significant source of uncertainty that had weighed on Indian markets throughout much of the previous year. Prolonged ambiguity surrounding bilateral trade relations and periodic diplomatic tensions had contributed to weakened investor sentiment and persistent foreign outflows, making this agreement a meaningful inflection point from market perspectives.
The agreement's core involves substantial reduction in trade frictions, with the United States immediately removing the 25% punitive duty linked to India's oil trade with Russia, while reciprocal tariffs are scheduled to decrease from 25% to 18% within days. Sector-specific tariffs under Section 232 will continue for steel, aluminum, and copper at 50%, while in auto components, existing 25% tariffs will be eliminated on half the import volume.
India has committed to purchasing $500 billion worth of US goods over five years, encompassing oil, gas, coking coal, aircraft and aircraft parts, precious metals, and technology products. This agreement follows closely on the heels of the India-EU free trade agreement and complements recent deals with the United Kingdom, EFTA countries, Oman, and New Zealand.
Sectoral Opportunities and Foreign Investment Dynamics
The trade agreement significantly reduces effective tariff burdens on Indian exports, restoring competitiveness in American markets. Sectors with direct exposure to US and European markets—including automobiles, chemicals, jewelry, wine, textiles, electronics, EMS, and pharmaceuticals—stand to benefit substantially from improved trade conditions.
From a broader market perspective, the US trade deal is expected to initiate a positive cycle regarding foreign portfolio investment inflows. With a key overhang removed, risk appetite toward Indian equities appears poised for improvement. Indian markets have experienced equity outflows approximating $34 billion since October 2024, representing the largest among emerging markets, reflecting both global risk aversion and trade-related uncertainty.
A potential turnaround in foreign portfolio investment flows would likely favor sectors with relatively high foreign ownership—such as real estate, telecommunications, transportation, financial services, and healthcare—alongside sectors where foreign positioning has been most underweight in recent years, including capital goods, financial services, IT services, and power utilities.
AI Disruption and Medium-Term Considerations
The initial euphoria surrounding the US trade deal proved short-lived as Indian IT stocks experienced sharp selloffs on February 4, mirroring global technology sector declines amid renewed concerns about AI disrupting traditional software and services models. Updated AI chatbot technology from Anthropic has heightened fears that automation could substantially impact low- and mid-level services work, while commentary from Palantir's earnings call highlighted AI-driven automation in complex ERP and SAP migration projects, compressing implementation timelines from years to weeks.
Despite these sector-specific challenges, most market experts maintain that the broader macroeconomic framework for Indian equities remains intact, advising investors against being swayed by short-term volatility episodes. The combination of benign earnings bases, gradual economic recovery trends, and recent tax reductions provides reasonable prospects for earnings recovery and medium-term consumption impetus.
Market analysts emphasize that while policy comfort can drive markets temporarily, sustainable rallies ultimately require corporate earnings delivery. With valuations in certain market segments already pricing in substantial positive developments, the risk exists that rallies could become narrow and sentiment-driven rather than fundamentally durable. The foundation appears strong, but the next phase depends more critically on execution capabilities and earnings visibility than on policy announcements alone.
