Key Takeaways
- You can capture alpha by targeting defence, railways, and high‑growth capital‑goods stocks as the budget ramps up spending.
- Real estate and metals are poised for a multi‑year runway thanks to policy nudges and rare‑earth focus.
- IT valuations have hit historical averages, offering downside protection and upside upside as US demand steadies.
- Private‑bank credit growth is back above 10%, but watch for seasonal stress in agri‑linked loans.
- Geopolitical volatility favors domestically‑oriented firms with RoE/RoCE > 15% and debt‑to‑equity < 1.
The Hook
You’re missing the biggest budget‑driven catalyst of 2026.
While the headlines scream “modest capex growth,” the underlying allocations to defence, railways, and rare‑earth mining signal a structural shift that could reshape the Indian equity landscape for the next five years. Ignoring these nuances isn’t just a missed opportunity—it could cost you relative underperformance versus peers who re‑balanced early.
Budget 2026 Capital Expenditure Outlook
ICICI Securities’ research head predicts a “modest” rise in capex after a historic base of ₹11.2 lakh crore. The term “modest” is a technical nuance: a 3‑4% YoY increase on such a massive denominator still translates to an extra ₹40‑50 billion of spend. More importantly, the growth rate of capex over FY21‑FY25 has been a blistering 20% + CAGR, meaning the budget is likely to maintain momentum rather than stall.
Capital expenditure (capex) refers to funds used by a government or corporation to acquire, upgrade, or maintain physical assets such as buildings, machinery, or infrastructure. Higher capex usually signals future earnings growth for related sectors.
Defence & Railways: The New Growth Engines
Defence allocation is expected to jump 15‑20% YoY, pushing the defence‑to‑GDP ratio toward 0.8% within five years. This is a stark contrast to the 0.5% level today and mirrors the post‑1998 reforms when India first began modernising its armed forces with private‑sector participation.
Railway spending will focus on high‑speed corridors, Vande Bharat trains, and the Kavaach programme. Historically, railway capex spikes have led to a 12‑15% uplift in steel and cement demand within 12‑18 months, as seen after the 2015 “Railway Revamp” budget.
Real Estate & Metals: Why They Matter Now
Real estate contributes 7‑8% of India’s GDP and is the second‑largest employer after agriculture. The budget is likely to expand the definition of affordable housing, effectively unlocking additional private‑sector projects. A broader definition means developers can target a larger price‑point range, potentially boosting construction‑related metal consumption.
Metals will also benefit from increased budgetary allocation for rare‑earth mining and processing. Rare‑earths are critical for defence electronics, EV batteries, and renewable energy gear, positioning India to reduce import dependence and capture a share of the projected $1 trillion global rare‑earth market by 2030.
Textile Tariffs & Export Relief: A Wake‑Up Call
The US has slapped high tariffs on Indian textiles, compressing margins for the sector that employs ~45 million workers. The budget may remove the 11% cotton import duty permanently, cutting raw‑material costs and restoring export competitiveness. Historically, a similar duty reduction in 2018 led to a 6% rise in textile export volumes within two quarters.
IT & Private‑Bank Earnings: Stabilisation Signals
IT services have begun to stabilise after a prolonged correction driven by US macro‑uncertainty. Deal‑pipeline data shows a 9% YoY increase in total contract value (TCV) for large‑cap firms, and valuations are now hovering around 15‑16x FY‑2026 earnings—close to long‑term averages.
In the banking arena, credit growth has rebounded to 10‑12% on strong retail and MSME demand. Asset quality remains robust, with non‑performing assets (NPAs) holding steady below 2% for major private banks. Deposit repricing and higher cash‑deposit (CD) ratios (up 150 bps QoQ) have bolstered net interest margins (NIMs), though a modest repo‑rate cut could compress NIMs marginally in Q4 FY26.
Geopolitical Risk Management for Indian Equities
Since the start of FY26, Indian indices have slipped ~4%, with small‑ and mid‑caps bearing the brunt. In such environments, the defensive playbook is simple: favour companies with RoE > 15%, RoCE > 15%, and debt‑to‑equity < 1.0. Domestic‑oriented firms—particularly those with strong cash conversion cycles—are likely to out‑perform export‑heavy peers if global trade tensions flare.
Historical precedent: During the 2013‑14 oil‑price shock, Indian equities with low leverage and high return ratios outperformed the broader index by 3‑4% annually.
Investor Playbook: Bull vs Bear Cases
Bull Case
- Allocate 20‑25% to defence and railways equities (e.g., Larsen & Toubro, Bharat Heavy Electricals) as capex ramps up.
- Take a 15‑20% position in select real‑estate developers and metal producers benefiting from affordable‑housing and rare‑earth policies.
- Re‑enter IT stocks at current valuations, focusing on large‑caps with strong US client exposure.
- Hold 10‑12% in private‑bank stocks that show resilient credit growth and stable asset quality.
Bear Case
- If fiscal prudence tightens further, capex allocations could be trimmed, hurting capital‑goods demand.
- A prolonged US tariff regime on textiles could erode margin recovery, limiting upside for exporters.
- Geopolitical escalation could revive capital‑flight, pressuring equities with higher foreign‑currency exposure.
In either scenario, keep a core of high‑quality, balance‑sheet‑strong stocks and avoid over‑weighting high‑beta, export‑dependent names until the policy signal solidifies.