Defence, infra emerge as budget favourites as markets firm up ahead of Union Budget 2026: smallcase

File picture: Vasanth Kamath, Founder and CEO, smallcase

Indian equity markets have staged significant volatility ahead of the Union Budget 2026, , as investor focus has sharpened on sectors likely to benefit from continued government spending and policy continuity.

Defence and infrastructure stocks lead sectoral optimism, reflecting expectations for sustained public capex and strategic allocations in the upcoming Budget.

According to a pre-Budget survey of smallcase Managers, defence has emerged as the top sectoral bet, with a large share of respondents expecting higher allocations driven by indigenisation, modernisation and export-led growth. Infrastructure follows closely, underpinned by confidence in the government’s ongoing push for roads, railways, urban development and other long-gestation projects that support long-term economic multipliers.

Capex themes dominate portfolio positioning

The survey highlighted that market participants continue to favour capex-led themes, with manufacturing also attracting attention on expectations of continued policy support through production-linked incentives. In contrast, consumption and agriculture are seen benefiting from more targeted measures rather than broad-based fiscal stimulus, in line with the government’s emphasis on fiscal discipline.

This preference for structural growth sectors comes amid expectations that the Union Budget will stay the course on fiscal prudence, while prioritising strategic spending that supports medium-term growth.

Markets volatile near term

While optimism remains intact, short-term market volatility around the Budget is expected, driven by event-based positioning and potential policy surprises. However, the consensus view is that such volatility is likely to be temporary, with markets reverting to fundamentals such as earnings growth, liquidity and macro stability in the weeks following the Budget.

Reflecting this confidence, smallcase managers expect the Nifty 50 to close FY26–27 above the 25,000 mark, with a significant proportion projecting levels well beyond 27,500, underscoring a constructive outlook for Indian equities over the medium term.

Inflation outlook supports policy continuity

Macro expectations also remain supportive, with a majority of managers forecasting inflation in the 4–5 per cent range in FY27. This benign inflation outlook reinforces expectations for policy continuity and provides room for the government to maintain its focus on capital expenditure without compromising fiscal stability.

As markets navigate Budget-related volatility in the near term, defence and infrastructure stocks are increasingly seen as key beneficiaries of India’s long-term growth agenda, anchoring portfolio strategies as investors look beyond the Budget event to the broader economic trajectory.

“As managers anticipate volatility around the Budget but remain confident about the medium-term trajectory, smallcase continues to offer a structured way for investors to participate in these themes with clarity and discipline,” said Vasanth Kamath, Founder & CEO, smallcase.

Published on January 22, 2026