Budget 2026: Will markets see a pre-Budget rally? Don't expect broad-based buying, say analysts

Market rally ahead of Budget?

• Sensex and Nifty fell ahead of Union Budget 2026, mirroring past cautious trends
• Pre-Budget rallies may focus on infrastructure, defense, and rural sectors.
• Experts recommend cautious investing, aligning portfolios with long-term growth themes.

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Finance Minister Nirmala Sitharaman will be presenting Union Budget 2026 on February 1. Investors are looking forward to a rally ahead of the Budget presentation, though markets remain in red at present.

Sensex dropped more than 250 points (0.3 percent) to close at 83,627.69 on January 13. Nifty 50 fell around 58 points (0.22 percent) to end the session at 25,732.30.

How did markets react ahead of the previous Budget?

Markets remained more or less flat with no major surprises ahead of Budget 2025. After closing 2024 at 23,644.80, Nifty 50 hit the month's high at 23,689.50 on January 9, 2025, marking only a marginal increase from December 31, 2024 closing level. Overall, the index ended January 2025 with slight losses before Finance Minister Nirmala Sitharaman presented Union Budget 2025 on February 1.

Sensex too more or less mirrored Nifty’s performance during the month, falling 0.8 percent in January 2025 before the Budget presentation.

"Historical trends indicate that the Indian market typically underperforms in January preceding a budget, with the Nifty falling in four of the last five years due to profit-booking and policy uncertainty. Current indicators reinforce this cautious outlook,” said Santosh Meena, Head of Research at Swastika Investmart.

Will markets rally ahead of Budget 2026?

The pre-Budget periods are characterised by higher levels of market volatility and not the usual straight-line move to the higher side, as the market tries to price in its views on fiscal spending, said Siddharth Maurya, Founder & Managing Director, Vibhavangal Anukulakara.

Swapnil Aggarwal, Director at VSRK Capital, also said that investors can expect some degree of pre-Budget positioning in the markets, though it is likely to be selective rather than a broad-based rally.

However, Maurya said there could be bouts of buying in selected sectors, identified with the focus area of the Government, such as infrastructure, manufacturing, and consumption. He added that one cannot expect a broad-based move purely on expectation. "The market shall have to await the Budget measures to ensure that concerns on growth are dealt with and fiscal discipline is seen," he concluded.

Aggarwal meanwhile said that the sentiment typically improves on expectations of growth-supportive measures, especially around capital expenditure, infrastructure push, and incentives for emerging sectors as the Union Budget approaches.

Cautious optimism:

"Recent market action suggests cautious optimism, with participants closely tracking macro signals, global cues, and fiscal discipline. While volatility may persist in the near term, incremental buying could emerge in pockets where policy continuity and earnings visibility are expected," the analyst said.

That said, markets are unlikely to price in aggressive outcomes ahead of the Budget, and any upside may remain measured until there is clarity on actual announcements, Aggarwal said, adding that the near-term trend points towards consolidation with intermittent rallies, as investors balance Budget optimism with valuation concerns and global uncertainties.

Which sectors will likely benefit?

Ahead of the Union Budget 2026, the market focus is sharpening on sectors likely to benefit from a government push for economic growth, particularly through capital expenditure and rural revival, said Santosh Meena, Head of Research at Swastika Investmart.

Infrastructire and defence: According to Meena, investors should look closely at infrastructure and defence, where expectations for sustained high allocation remain strong to support 'Make in India' initiatives. In the infrastructure space, companies like HG Infra Engineering and Larsen & Toubro (L&T) are top picks due to strong order books, while the defence sector offers opportunities in Bharat Electronics (BEL), Hindustan Aeronautics (HAL), and Mazagon Dock as they benefit from localization policies.

Renewables and critical minerals: Additionally, renewables and critical minerals are gaining traction, with stocks like National Aluminium Company (NALCO), Tata Power and GMDC in focus due to the global shift toward green energy and energy security.

Consumption and agriculture: The consumption and agriculture sectors are critical themes this year, driven by expectations of fiscal stimulus to address rural distress, Meena said. “The market anticipates measures such as enhanced subsidies or tax relief to boost disposable income, which would directly benefit the rural economy. Consequently, agricultural inputs are a key area to watch, with stocks like UPL, Dhanuka Agritech, Fertilisers And Chemicals Travancore (FACT) and Coromandel International positioned to gain from farm support schemes,” according to the analyst. This rural recovery narrative extends to broader consumption plays - FMCG giants like Hindustan Unilever (HUL) and ITC are defensive bets, while Mahindra & Mahindra (M&M) serves as a strong proxy for both auto and rural demand.

Banks: Financials, particularly State Bank of India (SBI) and HDFC Bank, remain foundational holdings to play the overall credit growth story, according to Meena.

"While a sharp, broad-based rally ahead of the Budget appears unlikely, selective upside cannot be ruled out in budget-sensitive sectors. Any pre-Budget rally is likely to be narrow, stock-specific and driven by expectations around capex, defence spending and rural support rather than a sustained market-wide move," the analyst concluded.

Investors may thus see pockets of rally, particularly in sectors linked to capital expenditure, infrastructure, manufacturing, defence, and rural consumption, as traders position themselves ahead of favourable policy cues, said Karthik Narayan, Vice President – Title, Tax & Transition, Stellar Innovations.

However, a broad-based and sustained rally will depend upon how far the Budget can balance growth stimulus with fiscal discipline, the analyst said.

What should investors do?

Narender Agarwal, Founder & CEO at Wealth1, also noted that any rally ahead of the Budget is likely to be measured rather than euphoric, and investors should avoid aggressive positioning purely on expectations, focusing instead on fundamentally strong businesses.

“For investors, the Budget should be seen as an opportunity to align portfolios with India’s long-term growth themes rather than focus solely on short-term volatility. A growth-oriented Budget, backed by strong economic momentum, can support broader market participation and set the stage for sustained returns beyond the Budget event,” said Tushar Badjate, Director of Badjate Stock & Shares.