Union Budget 2026-27: Macroeconomic Reset and Market Rebalancing
1. Overview: From Stimulus to Structural Strength
The Union Budget for the financial year 2026-27, presented on February 1, 2026, marks a deliberate shift in India’s economic playbook. After several years of pandemic-era support and demand-boosting measures, the fiscal stance has now turned firmly towards long-term capacity building under the broader vision of “Viksit Bharat”.
Instead of focusing on short-lived, consumption-centric incentives, the Budget pivots to medium- and long-term growth fundamentals, aiming to:
- Sustain high real growth,
- Deepen inclusiveness, and
- Strengthen macro-fiscal credibility.
A key departure in strategy is the move from concentrating mainly on the annual fiscal deficit number to explicitly targeting the overall debt-to-GDP ratio. The Government has formally articulated a medium-term goal of bringing the public debt-to-GDP ratio down to 50% by FY 2030-31. This is expected to:
- Enhance fiscal discipline,
- Align India more closely with global sovereign rating benchmarks, and
- Reduce the sovereign risk premium, thereby lowering borrowing costs and facilitating stable foreign direct investment flows.
Financial markets, particularly derivatives, have reacted sharply to certain micro-structural measures such as the Securities Transaction Tax (STT) hike, reflecting the tension between efforts to curb speculative excesses and the market’s dependence on abundant, low-cost liquidity.
2. Macro-Fiscal Architecture and Economic Outlook
2.1 Fiscal Deficit, Spending and Growth Assumptions
For FY 2026-27, the fiscal deficit has been budgeted at 4.3% of GDP, marginally lower than the revised estimate of 4.4% for FY 2025-26. This marginal consolidation is accompanied by a robust capital expenditure thrust, with planned capex rising to ₹12.2 lakh crore.
As per the Economic Survey 2026, the macro projections underlying this framework include:
- Real GDP growth: 6.8%–7.2% in FY27
- Nominal GDP growth: ~10.1%
- Net tax revenue: ₹28.7 lakh crore
This combination of strong nominal growth and improving tax buoyancy creates a supportive backdrop for fiscal consolidation without sacrificing growth.
2.2 Comparative Fiscal Metrics: FY26 vs FY27
| Metric | FY26 Revised Estimate (RE) | FY27 Budget Estimate (BE) | Strategic Objective |
|---|---|---|---|
| Fiscal Deficit (% of GDP) | 4.4% | 4.3% | < 4.5% by FY26 |
| Debt-to-GDP Ratio | 56.1% | 55.6% | 50% by FY31 |
| Capital Expenditure | ₹11.2 Lakh Crore | ₹12.2 Lakh Crore | Infrastructure and capacity expansion |
| Gross Market Borrowing | ₹14.82 Lakh Crore | ₹17.2 Lakh Crore | Debt rollovers and fresh funding |
| Revenue Expenditure | ₹38.69 Trillion | ₹41.3 Lakh Crore | Calibrated revenue growth |
| Nominal GDP Growth | ~10.5% (Projected) | ~10.1% (Budgeted) | Macroeconomic stability |
The jump in gross market borrowing to ₹17.2 lakh crore is driven largely by heavy redemptions of about ₹5.5 trillion. While this headline number initially stressed the bond market, the Government has cushioned the impact through sizeable non-tax revenues, most notably:
- A projected RBI dividend of ₹3.16 trillion, which bolsters the exchequer and supports the borrowing programme.
Note: The fiscal stance seeks to demonstrate that higher gross borrowing is not symptomatic of stress, but rather a calibrated liability management exercise backed by healthy revenue streams.
3. Equity Markets: Volatility Shock and Structural Reset
3.1 Short-Term Market Response
The equity markets responded sharply on Budget announcement, but the reaction was overwhelmingly centred on the derivatives tax hike rather than macro fundamentals.
During a special Sunday trading session:
- Nifty 50 corrected by about 1.96%, and
- BSE Sensex slipped over 2,300 points from the intraday top before closing 1.88% lower.
This sell-off was a function of sudden changes in derivatives economics at a time when retail participation in F&O has been at historic highs.
3.2 STT Hike on Derivatives: Intent and Impact
The Budget proposes a significant escalation in STT on equity derivatives, signalling a conscious attempt to cool speculative retail trading, particularly in high-leverage products. This follows a SEBI study indicating that over 90% of individual F&O traders incur net losses.
Revised STT Structure
| Transaction Type | Previous STT Rate | Proposed STT Rate (Budget 2026) | Direct Impact on Traders |
|---|---|---|---|
| Futures Contracts | 0.02% | 0.05% | 150% increase in trading cost |
| Options (on Premium) | 0.1% | 0.15% | 50% increase in trading cost |
| Options (Exercise) | 0.125% | 0.15% | 20% increase in trading cost |
Consequences for market microstructure include:
- Higher impact costs for traders, hedgers and arbitrageurs,
- Margin compression for high-frequency trading (HFT) strategies and scalpers,
- Likely decline in turnover in the near term, and
- Modest widening of bid-ask spreads, at least during the adjustment phase.
Market practitioners largely view this as a corrective step to curb overly leveraged retail speculation and reduce systemic build-up of risk, even if it temporarily dampens liquidity.