Key Highlights

• Budget, RBI stance, and trade deals lift macro sentiment

• Fiscal deficit for FY27 set at 4.3 percent with focus on stability

• Capital expenditure to rise 11.5 percent to INR 12.2 lakh crore

• Strong push for infrastructure, semiconductors, and data centres

• RBI signals shift of growth responsibility to fiscal policy

• Earnings growth expected in high single digits in 2026

• Elevated valuations make earnings the key driver for markets

Improving Macro Sentiment After Policy Support

In the past few weeks, India has seen a series of supportive developments that have improved confidence in its economic outlook. The Union Budget presented a careful plan for growth and fiscal discipline. At the same time, trade agreements with the United States and the European Union have reduced concerns about tariffs and export pressures. These two regions are India’s largest trading partners, and easing trade uncertainty is an important relief for exporters and overall GDP growth.

With these external concerns reducing, the broader macro environment appears more stable. As a result, attention in financial markets is slowly shifting away from policy support and moving towards corporate earnings as the next major trigger.

Fiscal Policy Shows Stability Rather Than Aggression

Government of India has chosen a balanced path in the FY27 Budget. The fiscal deficit target is set at 4.3 percent of GDP. While this is a slower pace of reduction than some market participants expected, it shows that the government is prioritising stability and long term planning over aggressive tightening.

The government expects nominal GDP to grow at around 10 percent, and the debt to GDP ratio is projected to improve slightly. This indicates that public finances are being managed with caution while still leaving room to support growth.

Importantly, government spending, which had been a mild drag on growth over the past few years due to fiscal consolidation, is now expected to turn neutral. This means fiscal policy may no longer slow down growth.

Capital Expenditure Remains the Core Growth Engine

A key highlight of the Budget is the continued focus on capital expenditure. For FY27, capex will rise by 11.5 percent year on year to INR 12.2 lakh crore. This spending includes investments in highways, railways, defence, and financial support to states through interest free loans for their infrastructure projects.

Such spending has a multiplier effect on the economy. It creates jobs, improves logistics, boosts demand for raw materials, and supports private sector participation. Over time, better infrastructure also improves productivity and competitiveness.

Building a Future Ready Economy Through Technology

The Budget also underlines India’s focus on becoming self reliant in critical technology areas. Initiatives such as Semiconductor Mission 2.0, a tax holiday for data centres until 2047, and the creation of a rare earth corridor show that policymakers are thinking beyond short term growth.

These measures aim to reduce dependence on imports in key sectors, attract global investments, and strengthen India’s role in global supply chains related to electronics, energy transition, and advanced manufacturing.

RBI Signals That Growth Support Is Shifting

Reserve Bank of India has played a major role in supporting growth over the past year through its monetary policy stance. However, with macro conditions improving and risks reducing, the RBI appears comfortable allowing fiscal policy and structural reforms to take the lead.

This shift suggests that monetary policy may now take a more neutral stance, while government spending and reforms become the primary drivers of economic momentum.

Market Focus Now Moves to Earnings Growth

With macro risks easing and policy clarity improving, equity markets are likely to focus more on corporate earnings. Earnings growth in 2026 is expected to be in the high single digits. This is lower than earnings expectations for several other Asian markets.

At the same time, Indian equity valuations remain elevated. This creates a situation where markets may not rise simply on positive sentiment. Instead, stock performance will depend heavily on actual earnings delivery by companies.

Trade deals - Good news comes in clusters

After fretting about the impact of US trade tariffs on goods exports for the majority of the past year, 2026 began with India striking trade deals with the EU and US over a span of few weeks. India and the European Union reached a Free Trade Agreement (FTA) in late January, after nearly 20 years of negotiations. While the much-anticipated US-India trade deal was announced by US President Trump and Indian PM Modi last week. The US has agreed to lower tariffs on Indian goods from 50% to 18%. It is worth noting that the 18% tariffs for India are lower than tariffs on other Asian peers which could help modestly boost India’s relative competitiveness. Key sectors such as garments, footwear, pharmaceuticals, leather goods and jewellery are set to gain from the removal of tariffs, which is especially positive for small and medium-sized exporters.

Over the medium-to-long term, the US-India trade deal is likely to be a positive for India’s manufacturing sector. This deal along with the recently concluded India-EU FTA can help India become an attractive destination for companies to diversify their supply chains as a part of the ongoing China + 1 theme.

RBI - Looking to pause

As anticipated, the Reserve Bank of India (RBI) kept repo rate steady at 5.25% in its February meeting after 125bps of easing in this cycle. We expect rates to stay unchanged over FY27, with growth support drivers now likely to come from the recently announced budget as well as trade deals with the EU and the US. Despite pausing rate cuts, the RBI has not turned hawkish, as it reiterated that it will continue to remain proactive with supplying enough liquidity, even pre-empting fluctuations due to government balances, currency in circulation, and FX intervention.

What This Means for Investors

For investors, this is a phase where careful stock selection becomes more important than broad market exposure. Strong macro conditions provide stability, but they may not be enough to drive significant market gains unless earnings growth improves.

Investors should track quarterly earnings trends, execution of infrastructure projects, progress in semiconductor and data centre initiatives, and the impact of recent trade deals on exports.

Conclusion

India’s economic environment looks stronger after the Budget, RBI signals, and trade agreements. External risks have reduced, and policy direction is clear. However, elevated valuations mean that the next phase of market movement will depend largely on earnings growth rather than macro support.

This marks a shift from policy driven optimism to performance driven market action, where fundamentals will matter more than sentiment.