Daily Voice | Budget 2026 unlikely to be game-changing, but a key anchor for foreign capital: HDFC’s Varun Lohchab

Varun Lohchab is the Head of Institutional Research at HDFC Securities

• Union Budget unlikely to be a game-changing event
• Expect government to continue with growth focus with fiscal discipline stance
• Budget a critical anchor for foreign capital
• Don't expect any rate cut from RBI in Feb policy, though inflation subdued currently

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According to Varun Lohchab, the Head of Institutional Research at HDFC Securities, the Union Budget 2026 isn’t expected to be any game-changing event. He expects the government to continue with the stance (of growth focus with fiscal discipline) without taking any radical reformist steps or assuming any significant economic risk incrementally.

Further, he is of the view that the budget is a critical anchor for foreign capital.

In the February policy meeting, Varun is not expecting any rate cut from the RBI, though inflation is subdued currently. He rather expects more liquidity measures asthe  RBI would focus more on the transmission of the rate cuts done in the recent past.

Will the Union Budget 2026 be a game-changing event? What could be the major announcements in the Budget?

In our opinion, the Union budget 2026 isn’t expected to be a game-changing event. In the past few years, the government has been moving ahead on a stated trajectory of growth focus with fiscal discipline. So far, the progress and execution are in line with the stated strategy, hence we expect the government to continue with the same stance without taking any radical reformist steps or assuming any significant economic risk incrementally.

In line with the government policies of AtmaNirbhar Bharat and Make in India, focus on manufacturing and capex is expected to be continued. Railway, renewable power, infrastructure, and defence manufacturing can expect improved budgetary allocations along with some new PLI announcements.

Can it help improve market sentiment, given that markets have remained largely rangebound for more than a year, despite recently hitting a new record high?

Nifty has been range-bound in the past year owing to soft earnings growth and limited valuation upside. We believe higher-than-expected capex allocation, pro-growth policy measures, in line fiscal deficit and favourable income tax stance for consumers have the potential to add optimism to the market in the short run.

However, we believe any durable medium-term strength is still dependent on the earnings growth of corporate India in FY27. As per our assessment, Nifty is expected to deliver high single to low double-digit earnings growth in FY26, with an estimate of 12%+ growth in FY27. Accordingly, this earnings delivery has the potential to create an upside of 5 to 10% in Nifty in the next year.

Do you think the Budget can give confidence to foreign institutional investors (FIIs) to return to the Indian markets?

This upcoming budget is a critical anchor for foreign capital. The Indian economy is expected to deliver nominal GDP growth of 8.5% in FY26, much below the budgetary estimation of 10.1%. However, this is expected to bounce back to 10.1% in FY27. This revival of GDP growth can potentially be a significant driver for attracting foreign flows.

Additionally, budgetary stance on tax stability, regulatory predictability, capex focus, and fiscal discipline are other key parameters which FIIs will be watching out for. A favourable stance of the government on these parameters can act as a catalyst for foreign flows into India.

Do you expect inflation to remain benign this year? If yes, do you see the possibility of at least a 50-basis-point rate cut by the RBI?

While inflation has started inching up from significantly low levels, we don’t expect it to overshoot the upper end of the RBI’s target band of 4-6%. We believe Inflation will remain in the range of 3-4.5% during FY27. Hence, broadly inflation will remain benign in the next financial year despite a low base of FY26.

While inflation is subdued currently, we still don’t expect any rate cut in the February policy. We rather expect more liquidity measures as the RBI would focus more on the transmission of the rate cuts done in the recent past. And, for FY27, we can’t rule out the possibility of a 25 bps cut during the year if inflation remains within a comfortable zone and growth needs further support. However, as per current estimates, a 50 bps cut doesn’t seem to be on the cards.

After reviewing the quarterly provisional business updates and recent Q3 numbers, are you confident about a strong Q3 earnings season?

We expect Q3FY26 results to be moderately healthy, like the previous quarter. At the aggregate level, this growth wouldn’t be very strong yet, while there are signs of bottoming out of few sectors (such as IT and consumers).

Our sector analysis indicates that metals and financials are likely to deliver strong performance in Q3 FY26. In contrast, consumption and IT sectors are expected to post tepid results this quarter, but they appear to be bottoming out. Consequently, these sectors are projected to show relatively stronger performance in FY27 and contribute meaningfully to overall earnings growth.

Do you think rising gold prices are improving India’s balance sheet?

Higher gold prices have supported the RBI’s balance sheet due to revaluation gains and have acted as a buffer against global volatility. The value of India’s gold reserves crossed $100 billion in CY25, which happens to be a strong forex reserve diversification tool as gold’s share in India’s forex reserves has risen to ~16% in January 2026, vis-à-vis ~8% by FY23 end.

However, rising gold prices have increased the probability of redemptions in sovereign gold bonds (SGBs), which adds to the government’s liabilities. It is to be noted that despite increasing liabilities, SGBs have played a crucial role in reducing the import of physical gold in India, which helps contain the current account deficit of the country.

In a summarised way, it can be concluded that despite pushing up the liabilities of SGB redemptions, rising gold prices have contributed towards strengthening India’s balance sheet.

Based on current market trends, do you think we are still not out of the woods? What factors could bring a bullish bias to equity markets?

Currently market is acting as a great leveller. Wherever there is valuation froth without adequate earnings support, that is getting corrected. At the same time, stocks with strong earnings delivery are witnessing appreciation and attracting investors’ capital. We are of the view that the market is expected to continue being earnings-driven in the medium term.

Earnings misses with elevated valuations will be punished, while any strong earnings growth will be rewarded adequately. Hence, strong earnings growth could bring bullish bias to the individual stocks. In this situation, we believe bottom-up stock picking is the most prudent way of investing, and index based or sector approach of investing wouldn’t deliver any meaningful outperformance.

Do you expect the midcap and smallcap indices to enter an uptrend only after the December quarter earnings season?

While through recent consolidation, froth has come out in many segments of the midcap and smallcap space, aggregate valuations remain high. Hence, we believe one should be selective while investing in the SMID space. Post December quarter results, stocks with sustained earnings momentum and stable margins should be preferred as the elevated valuations leave little room for error.