Union Finance Minister Nirmala Sitharaman will table the Union Budget for FY2026–27 on February 1, 2026, as the government remains on course to meet its fiscal deficit target of 4.4% of GDP, despite a low nominal GDP growth and higher capital expenditure.
Morgan Stanley expects India’s fiscal consolidation to continue in FY27, albeit at a slower pace, with the central government likely to peg the fiscal deficit at 4.2% of GDP, compared with a targeted 4.4% in FY26. This would mark the shallowest pace of consolidation since FY23, while still remaining consistent with the government’s medium-term debt reduction roadmap.
According to the global investment bank, a fiscal deficit of 4.2% in FY27 would help bring central government debt down to around 55.1% of GDP from an estimated 56.1% in FY26. Over the medium term, Morgan Stanley expects the government to pursue gradual consolidation to meet its stated goal of reducing the debt-to-GDP ratio to about 50% (±1 percentage point) by FY31.
The brokerage expects the upcoming Union Budget 2026 to focus on three broad themes: sustained capital expenditure to support job creation, targeted social sector spending, and a renewed push on structural reforms.
A pickup in nominal GDP growth is likely to aid tax buoyancy and improve revenue collections in FY27, giving the government room to prioritise capex and social infrastructure spending even as it continues with fiscal consolidation.
Stock market strategy
On equity markets, Morgan Stanley notes that the budget’s direct impact on market performance has diminished over time. However, market moves tend to depend heavily on pre-budget expectations. With investors currently approaching the budget with a degree of scepticism, the firm believes there is potential for both volatility and upside surprise in the post-budget period, if historical patterns hold.
For equities, key monitorables will include the extent of fiscal consolidation, the scale and composition of capital expenditure, and sector-specific policy measures. Capital market reforms aimed at reviving foreign portfolio inflows will be watched closely. Morgan Stanley remains overweight on financials, consumer discretionary stocks and industrials.
Macro Strategy
From a macro and fixed income perspective, the firm expects net government securities (G-sec) issuance to remain broadly stable at around ₹11.6 lakh crore in FY27, marginally higher than ₹11.5 lakh crore in FY26. Gross issuance, however, could rise to about ₹15.8 lakh crore due to higher redemptions. Morgan Stanley’s issuance estimates are at the lower end of market expectations, which could support a temporary rally in G-secs if realised.
The brokerage notes that in FY26, G-sec supply was concentrated in the 5-year, 10-year, 15-year and 40-year tenors, with the Reserve Bank of India absorbing a larger share of supply. It prefers paying 5-year INR overnight indexed swaps on dips and maintains a neutral stance on the rupee.
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