Budget 2026 caps fiscal risk, shifts market focus to earnings and debt path: BofA

Representative image

Reviewing the Budget for FY27, BofA said the Centre has met its FY26 fiscal deficit target of 4.4% of GDP and pegged the FY27 deficit at 4.3%, in line with expectations, reinforcing its commitment to fiscal discipline.

“MoF is now pivoting to a debt targeting framework from FY27,” BofA said, adding that the focus has shifted away from deficit targets towards debt sustainability, with the Centre targeting a debt-to-GDP ratio of 55.6% in FY27.

The brokerage described the Budget as “overall conservative”, noting that revenue and expenditure assumptions appear realistic, if not cautious.

“The broad trend on non-tax revenues and tax revenues are a bit conservative in our view,” BofA said, flagging potential upside only if economic recovery strengthens.

On spending, BofA pointed out that while capital expenditure is budgeted to rise 11.5% year-on-year to Rs 12.2 trillion in FY27, capex remains flat at 3.1% of GDP, with execution emerging as a key monitorable.

“Capex spending remains underwhelming,” the report said, highlighting that FY26 capex was revised down even as headline allocations rose.

The brokerage also drew attention to rising interest costs, with interest payments climbing to 40% of total revenue in FY27 and debt servicing increasing over 10% year-on-year — a factor that could keep bond yields and rate expectations in focus.

On the demand side, BofA flagged cautious assumptions for indirect taxes, with GST collections budgeted to decline 2.6% year-on-year in FY27, making monthly GST trends a key indicator of underlying earnings momentum.

BofA said the Budget prioritises stability over stimulus, effectively capping fiscal risk for markets, while shifting the spotlight to corporate earnings, debt dynamics and the pace of capex execution in the months ahead.