Union Budget 2026–27 set the tone for a turbulent start in Indian equity markets. After a sharp sell-off on Budget Day, markets staged a notable rebound on February 2, with benchmark indices clawing back a portion of their losses. The recovery reflected a reassessment of the Budget’s intent—balancing fiscal discipline with growth-oriented spending—after initial concerns around taxation and borrowing rattled investor sentiment.

From Shock to Stabilisation

Budget announcements often trigger knee-jerk market reactions, and this year was no exception. The immediate sell-off stemmed from measures that directly impacted market liquidity and trading costs, particularly in derivatives. However, as investors digested the broader macro picture—capex continuity, tax relief, and reform signals—confidence began to return. The rebound underscored the market’s attempt to separate short-term pain from longer-term opportunity.

What Drove the Market Recovery

Large-cap stocks led the bounce, with heavyweight companies attracting value buyers after steep declines. Energy and infrastructure names emerged as clear leaders, supported by expectations that the government’s capital expenditure roadmap would remain intact. Lower global crude prices also eased cost pressures for energy-intensive businesses, reinforcing optimism around earnings stability.

Infrastructure-linked stocks benefited from clarity that public investment would remain a central pillar of economic strategy. Logistics, power transmission, defence manufacturing, and construction firms saw renewed interest as investors priced in steady order flows over the medium term. Autos, cement, and select consumer-facing sectors also participated, buoyed by tax relief measures that are expected to support consumption.

Currency stability and proactive liquidity management by the Reserve Bank of India further helped sentiment, while benign global cues—such as easing geopolitical tensions affecting oil markets—provided external support.

Understanding the Budget Hangover

The sharp fall on Budget Day was driven by specific triggers rather than a wholesale rejection of policy direction. The increase in securities transaction tax on futures and options trading dampened sentiment across broking, exchange, and capital market stocks, raising concerns about reduced volumes and profitability. Elevated government borrowing plans also pushed bond yields higher, weighing on interest-sensitive sectors, particularly public sector banks.

These measures were interpreted as a signal to curb speculative excesses and reinforce fiscal prudence. While painful in the short run, they align with the government’s broader objective of financial stability, even if markets needed time to adjust.

Sectoral Winners and Laggards

The post-Budget landscape has become more differentiated. Infrastructure, capital goods, defence, and energy appear structurally well-placed due to sustained public spending and policy support. Startups and MSMEs drew cautious optimism following the removal of angel tax and expanded credit guarantees.

On the other hand, broking and exchange stocks face near-term headwinds from higher transaction costs, while PSU banks remain sensitive to borrowing dynamics and consolidation discussions. Mid- and small-cap stocks lagged the rebound, reflecting continued profit-booking and risk aversion.

Analytical Outlook: Volatility with a Constructive Bias

Market experts broadly view the Budget as macro-positive despite near-term volatility. Manufacturing indicators point to resilience, and domestic institutional investors have stepped in to absorb foreign selling. However, global uncertainties—ranging from trade tensions to uneven corporate earnings—suggest that sharp swings may persist.

A Test of Patience and Perspective

The post-Budget rebound illustrates how quickly sentiment can shift once policy intent becomes clearer. Union Budget 2026–27 may have unsettled markets initially, but its emphasis on capex-led growth, fiscal discipline, and consumption support provides a foundation for longer-term stability. For investors, the message is clear: volatility may linger, but the structural growth story remains intact.

(With agency inputs)