Union Budget FY27: 5 decisions that could impact markets, says Kotak Securities

According to Kotak Securities, India’s Union Budget for FY27 is likely to hinge on five quiet but consistent policy choices that could shape both the equity and bond markets in the coming year. In a volatile global context marked by geopolitical tensions and trade uncertainty, the brokerage expects the government to prioritize stability over spectacle, slow the pace of fiscal consolidation, maintain capital spending and lean on booming non-tax revenues even as higher borrowing threatens to disrupt the bond market.Kotak Securities estimates the Centre’s gross fiscal deficit at 4.3% of GDP in FY27, only marginally lower than the estimated 4.4% in FY26, indicating a deliberate easing of the consolidation path. “India’s current economic backdrop, shaped by geopolitical tensions and trade uncertainty, warrants a stable, growth-supportive stance in the Union Budget 2027,” the brokerage said.

1) A slower path of fiscal consolidation

At the heart of Kotak’s budget calculation is a conscious decision to delay budget tightening. The brokerage noted that the Centre’s debt-to-GDP target of 50±1% by FY 2031 allows for a modest annual reduction in the fiscal deficit ratio of 10-20 basis points. Against this backdrop, the bank expects FY27 gross domestic product/GDP to reach 4.3%, reflecting continued capex momentum, modest tax burden and large transfer of RBI surpluses.

2) Limited scope for fiscal stimulus or populism

After the income tax cuts and VAT rate cuts in FY26, Kotak sees little room for big, market-friendly giveaways. “Following the income tax cuts and GST rate reductions in FY2026, and given the prevailing fiscal constraints, we see limited scope for any major fiscal stimulus in the FY2027 budget,” the report said. With committed expenditure accounting for around 60% of revenue expenditure, outright populism would risk putting pressure on the budget balance, even as several states have turned to cash transfers.

3) Capex remains the policy anchor

The third key decision, Kotak said, will be to keep the focus firmly on capital expenditure. The brokerage expected capital expenditure growth of 9% in FY27, with a sharp focus on defence, where it expects expenditure to rise 20%, and continued support through loans for states’ capex programmes. Revenue expenditure, on the other hand, is growing at a more moderate 5%, underscoring the Centre’s preference for growth-supporting investments over consumption-led stimulus.

4) Revenues supported by taxes and a sizeable RBI surplus

On the revenue side, Kotak forecasts gross tax revenue growth of 9% in FY27, driven by 11% growth in corporate taxes and 12% growth in personal income taxes, supported by nominal GDP growth of 10-10.5%, stronger corporate profits and moderate wage increases. Indirect taxes are expected to benefit from strong GST and excise duties, due to higher taxes on tobacco.

However, a crucial buffer comes from non-tax revenues. Kotak estimates the RBI’s surplus transfer at Rs 2.9 trillion in FY27, compared to Rs 2.7 trillion in FY26, citing continued strength in foreign and domestic income. It also assumes a slight increase in decentralization to states, following the likely recommendations of the 16th Finance Commission.

5) Higher loans, turmoil in the bond market

While stock markets may be disappointed by the lack of major announcements, the bond market could become more uneasy due to the fifth decision: higher borrowing. Kotak estimates gross government borrowings at Rs 16 trillion in FY27, compared to Rs 14.8 trillion in FY26, due to large redemptions. Net dated securities lending is pegged at around Rs 12 trillion, with another Rs 1 trillion through government bonds. The broker warned that this could “increase pressure on the yield curve”.

All in all, Kotak’s outlook paints a picture of a budget that is deliberately understated and tries to strike a balance between growth support and budget credibility. For the markets, the signals may be subtle rather than dramatic, but brokers argue they could still be decisive in shaping FY27 sentiment.

(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of the Economic Times)