Daily Voice: This CIO flags Budget triggers that could spook Dalal Street

Deepan Kapadia is the Executive Director & CIO – Portfolio Management Services at Spark Capital PWM

• Markets may be disappointed if Budget misses fiscal consolidation roadmap
• Another negative trigger could be capital gains tax tweaks, capex dilution
• Earnings recovery appears gradual but increasingly broad-based

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"The markets could potentially be disappointed if there is any slippage from the stated fiscal consolidation roadmap, as deviations from deficit targets would raise concerns around macro discipline and higher borrowing costs," said Deepan Kapadia, the Executive Director & CIO – Portfolio Management Services at Spark Capital PWM in an interview to Moneycontrol.

According to him, another negative trigger for the markets could be capital gains tax tweaks, and capex dilution in favour of aggressive deficit cutting could also disappoint.

He believes earnings recovery appears gradual but increasingly broad-based. December quarter results indicate margin stabilisation and improving demand in financials, industrials, and select consumption segments, he said.

If you were the Finance Minister, what would be the three key priorities in the Union Budget?

If I were the Finance Minister, my three key priorities in the Union Budget would be to preserve growth while maintaining fiscal credibility by adhering to the fiscal consolidation path without sacrificing growth-supportive spending. I would also sustain public capex to crowd in private investment, continuing a strong push on infrastructure, logistics, power, and manufacturing-linked capital expenditure to support the investment cycle and drive productivity gains.

Finally, I would support consumption in a targeted manner by providing calibrated relief to middle-income households and employment-linked incentives, rather than adopting broad populist measures.

What aspects of the Union Budget could potentially disappoint the markets?

The markets could potentially be disappointed if there is any slippage from the stated fiscal consolidation roadmap, as deviations from deficit targets would raise concerns around macro discipline and higher borrowing costs. Another negative trigger could be capital gains tax tweaks, particularly an increase in short-term or long-term capital gains tax to bridge fiscal gaps, which would be viewed unfavourably by equity markets.

Additionally, capex dilution in favour of aggressive deficit cutting could also disappoint, as markets may worry that fiscal consolidation at the expense of capital expenditure would weaken the growth multiplier and dampen earnings momentum.

Is the EU–India trade deal likely to be larger than a potential US–India trade deal?

Yes, the EU–India trade agreement is likely to be broader and structurally more significant, as it assumes greater stability and spans goods, services, digital trade, sustainability, and regulatory alignment. In contrast, a potential US–India deal is more likely to remain sector-specific and transactional, shaped by geopolitical and electoral considerations.

Additionally, while negotiations with the US are often constrained by sudden tariff hikes and ‘America First’ rhetoric, the EU deal offers a more structured, rules-based framework that supports services and high-end manufacturing.

What are the three major risks facing India at present?

At present, India faces three major risks. The first is global macro risk, where slower global growth or renewed financial market volatility could impact exports and capital flows. The second is geopolitical and commodity shocks, particularly oil price volatility, which can influence inflation, fiscal dynamics, and the rupee.

The third is equity valuation risk, as current market valuations leave limited room for earnings disappointment in the near term.

Are earnings beginning to improve and likely to catch up with valuations after the December quarter results?

Earnings recovery appears gradual but increasingly broad-based. December quarter results indicate margin stabilisation and improving demand in financials, industrials, and select consumption segments. While pockets of the market remain expensive, FY26 earnings visibility is improving, which could help justify current valuations if momentum sustains.

Does sentiment toward the rupee remain downbeat?

Near-term sentiment remains cautiously negative due to high US yields and a strong dollar. However, RBI’s active intervention, healthy FX reserves, and India’s growth resilience limit downside risks. Medium-term outlook points to stability rather than sharp appreciation.

What are your expectations from the RBI’s February meeting?

The RBI’s February meeting is expected to result in a policy pause, with a focus on liquidity management while maintaining a balanced stance between growth and inflation.