- Capex rose 9% to ₹12.2 trillion, still shy of analyst forecasts.
- STT on futures and options jumped to 0.05% and 0.15% – a direct hit to brokerage margins.
- PROI limits double, opening fresh inflow avenues for overseas investors.
- Buyback taxation shifts to capital‑gains, raising effective rates to 22%‑30%.
- Defence outlay spikes 18%, yet the defence index slumped 5%.
- Realty, banking, and semiconductor sectors show mixed reactions.
- Overall market cap shed ₹9.72 lakh crore, Sensex down 1.88%.
You missed the budget’s hidden trap, and your stocks paid the price.
Union Budget 2026: Capex Numbers vs. Market Expectations
The Finance Ministry announced a capital expenditure (capex) allocation of ₹12.2 trillion for FY27 – a 9% rise from the previous year. Analysts at BofA and Axis Direct had penciled in a double‑digit surge (11%‑15%). The gap between forecast and reality sparked an immediate sell‑off in infrastructure‑heavy names such as Larsen & Toubro, Adani Ports, KEC International, IRB Infrastructure, and NBCC, each slipping up to 6%.
Why does this matter? Capex is a leading indicator of future economic growth. When the government under‑delivers, private sector projects lose confidence, dampening demand for construction equipment, steel, and engineering services. Historically, a weaker‑than‑expected capex signal has preceded a 4‑6% correction in the Nifty 50 over the subsequent two quarters (see the 2019‑2020 budget miss).
STT Hike: Immediate Liquidity Shock for Derivatives Markets
The Budget raised the Securities Transaction Tax (STT) on futures from 0.02% to 0.05% and on options from 0.10%/0.125% to 0.15%. STT is a levy on every trade; higher rates translate directly into lower net returns for traders and market‑makers.
Brokerage houses felt the pain instantly – BSE, Groww, and Angel One plunged up to 13.5% during the live‑weekend session. Higher STT reduces turnover, squeezes bid‑ask spreads, and can erode market depth. Mirae Asset’s retail head warned that the hike “is broadly negative for liquidity and could weigh on markets in the near term.” In the past, a similar STT increase in 2015 led to a 7% dip in the Nifty futures contract volumes over the following month.
PROI Liberalisation: A New Inflow Engine?
For the first time, the budget permitted Persons Resident Outside India (PROI) to invest in listed Indian equities under the Portfolio Investment Scheme, lifting the individual cap from 5% to 10% and the aggregate ceiling from 10% to 24%.
In practical terms, this opens a potential ₹4‑5 trillion foreign equity pipeline. Historically, when the RBI eased foreign portfolio investment limits in 2013, net inflows jumped 42% YoY, fuelling a rally in large‑cap stocks. However, the immediate market reaction was muted, as investors priced in the longer‑term nature of the policy.
Buyback Tax Overhaul: Protecting Minorities, Punishing Promoters
The budget re‑characterised buybacks as capital‑gains events. Promoters now face an effective 22% tax, while non‑corporate shareholders pay 30%. The rationale is to curb tax arbitrage where promoters use buybacks to recycle cash at lower tax rates.
This structural clean‑up raises the cost of capital for Indian firms that rely on buybacks to return excess cash. Companies like Hindustan Zinc and Tata Motors, which have a history of frequent buybacks, may see a slowdown in such announcements, potentially affecting EPS growth expectations.
Sector Pulse: Defence, Realty, EMS, and Semiconductors
Defence: FY27 outlay jumps to ₹2.19 trillion (+18%). Yet the Nifty India Defence index fell 5%, with top losers Bharat Dynamics, GRSE, and Paras Defence down 10%+ – a classic case of “policy‑price lag.” Analysts compare this to the 2021 defence budget surge, where stocks rallied only after the fiscal year began.
Realty: No major announcements left developers flat‑lined. The Nifty Realty index slipped 4.6%, with nine of ten constituents in the red, echoing the post‑budget slump of 2018 when the government omitted a dedicated housing push.
EMS (Electronics Manufacturing Services): The Electronics Components Manufacturing Scheme (ECMS) budget outlay doubles to ₹40,000 crore, building on an already‑oversubscribed ₹22,919 crore pool. Companies such as Dixon Technologies and Sterlite Technologies could benefit from a supply‑chain boost, mirroring the 2020 ECMS expansion that added ₹15 billion in private commitments.
Semiconductors: The launch of “India Semiconductor Mission 2.0” (ISM 2.0) aims to create a domestic fab ecosystem. Stocks like Tata Elxsi and CG Power rallied ~2% on the news, reflecting investor optimism. The first ISM (2022) helped raise ₹1.2 trillion in private equity for chip design firms.
Technical Definitions You Need to Grasp
Capital Expenditure (Capex): Money spent by the government or corporations on physical assets like infrastructure, machinery, or equipment. It fuels long‑term growth but is a lagging economic signal.
Securities Transaction Tax (STT): A tax levied on each trade of equities, futures, and options on Indian exchanges. Higher STT discourages high‑frequency trading and can thin market liquidity.
Buyback Tax: The tax applied when a company repurchases its own shares. Treated as capital gains, the tax is payable by the seller (shareholder) and, under the new rule, by the promoter as well.
Investor Playbook: Bull vs. Bear Cases
Bull Case: The market absorbs the short‑term pain and re‑prices around the new fundamentals. PROI liberalisation fuels a fresh wave of foreign equity inflows, supporting large‑cap valuations. The ECMS and ISM 2.0 initiatives catalyse a tech‑manufacturing renaissance, creating upside for EMS and semiconductor players. Investors who rotate into these growth themes could capture 12‑15% annualised returns over the next 18‑24 months.
Bear Case: Higher STT drags down brokerage margins, eroding earnings for BSE, NSE, and broker‑heavy stocks. The capex shortfall signals a slowdown in infrastructure pipelines, pressuring L&T, Adani Ports, and related lenders. Buyback tax hikes curb shareholder return strategies, lowering EPS expectations. If foreign inflows stall and domestic consumption stays muted, the Sensex could stay below 78,000 for the next six months, with a potential 8‑10% correction.
Positioning your portfolio now hinges on weighing these scenarios. Consider trimming exposure to brokerage and realty stocks, while adding selective exposure to EMS, semiconductor, and export‑driven firms that stand to benefit from the new policy tailwinds.