
Key Highlights
1. Fiscal Consolidation on track
- Reduction in fiscal deficit target to 4.4% of GDP for FY 26 vs 4.5% that was earlier announced – in line with fiscal consolidation glide path to reduce fiscal deficit below 4.5% of GDP by FY26.
2. Personal Income Tax (new regime) reduced to boost consumption
3. Capital Expenditure Growth has moderated
- FY25 Capex revised down to Rs 10.2 lakh cr from Rs 11.1 lakh cr
- Capital Expenditure at Rs 11.2 lakh cr in FY26 (i.e 3.1% of GDP) remains flat – last year budget estimate (Rs 11.1 lakh cr in FY25)
4. Govt has signalled upcoming regulatory reforms to improve ease of doing business, simplify taxation and streamline compliance
5. No Change in Capital Gains Taxation for Investors
Budget in Visuals
Nominal GDP Projection for FY25 = INR 324 lakh crores (9.7% growth over INR 295 lakh crores in FY24)
Nominal GDP Projection for FY26 = INR 357 lakh crores (10.1% growth over INR 324 lakh crores in FY25)
Where does the money come from?
Where does the money get spent?
How much is the deficit between spending and earning?
How is the deficit financed?
Fiscal Consolidation On Track..
Tax Receipts as a % of GDP remains stable..
Personal Income Tax has reduced – No Tax for Income <12 lakhs
Enhanced rebate and revised income tax slabs eliminate tax on income up to INR 12L. Old income tax slabs remain unchanged.
Capex growth has moderated..
No dilution in quality of spending -> Subsidies at 5 year low
What’s in it for you?
1. How much will you save (new taxation regime) post the reduction in tax?
2. No Change in Capital Gains Taxation
3. What gets Cheap and Costly
Other Important Announcements
- Changes in TDS limits – Tax deduction limit on interest earned by senior citizens has been increased to Rs 1 Lakh (currently Rs 50,000) and non-senior citizens to Rs 50,000 (currently Rs 40,000). TDS threshold on rent has been increased to Rs 6 Lakh per annum from ₹ 2.4 Lakh per annum. TDS threshold on Dividend income has also been increased.
- Changes in TCS limits – TCS threshold for remittances made under the RBI’s Liberalized Remittance Scheme (LRS) is proposed to be increased from Rs 7 lakh to Rs 10 lakh. Secondly, the TCS on remittances for education purposes is expected to be removed when the remittance is out of a loan taken from specified financial institutions.
- Redemption proceeds from ULIPs with annual premium above 2.5 lakhs will be treated as long term capital gains and taxed at 12.5% if held for more than 12 months.
- Tax exemption is now available for two self-occupied properties i.e. you can claim zero valuation for the second house property even if it is unoccupied/not rented out (this was earlier taxed based on deemed income).
- New Income Bill to be introduced next week – to streamline compliance and improve ease of doing business.
FundsIndia Equity View: Shifting Gears -> Focus shifting to consumption revival as pace of capex slows down
The budget delivered an unexpected boost to consumption by significantly lowering income tax—exempting incomes up to ₹12 lakh—thereby increasing disposable income for consumers. In contrast, capital expenditure (capex) growth has been subdued compared to last year’s budget estimates. The government appears to be shifting its focus, signaling that private sector capex will now be expected to drive investment momentum.
This subtle pivot toward stimulating consumption over public capex stands out as the budget’s key takeaway.
Overall, we maintain our POSITIVE outlook on Equities over a 5-7 year horizon, anticipating reasonable earnings growth in the coming years. We believe we are currently in the mid stage of a multi-year bull market.
Large caps look attractive given the recent correction due to sharp FII sell offs and reasonable valuations. Small cap Valuations continue to remain high and incremental investments can be avoided.
The ‘quality’ investment style, after nearly four years of underperformance since 2020, has shown early signs of a turnaround since mid-2024. With the government now prioritizing consumption-driven growth, this shift further strengthens the outlook for quality stocks. We remain positive on the quality style and continue to incorporate it within our Five Finger Strategy—diversified across value, quality, growth at a reasonable price, mid & small caps, and global/momentum themes.
Our Equity view is derived based on our 3 signal framework driven by
- Earnings Cycle
- Valuation
- Sentiment
As per our current evaluation we are at
MID PHASE OF EARNINGS CYCLE + NEUTRAL VALUATIONS + MIXED SENTIMENTS
- MID PHASE OF EARNINGS CYCLE
We expect a reasonable earnings growth environment over the next 3-5 years. This expectation is led by Manufacturing Revival, Banks – Better asset quality & pickup in loan growth, Revival in Real Estate, Early signs of Corporate Capex, Structural Demand for Tech services, Government’s focus on Consumption boost, Structural Domestic Consumption Story, Consolidation of Market Share for Market Leaders, Strong Corporate Balance Sheets (led by Deleveraging) and Govt Reforms (Lower corporate tax, Labour Reforms, PLI) etc. - NEUTRAL VALUATIONS
FundsIndia Valuemeter based on MCAP/GDP, Price to Earnings Ratio, Price To Book ratio and Bond Yield to Earnings Yield has reduced from 72 last month to 66 (as on 31-Jan-2025) – moved from Expensive zone to ‘Neutral’ Zone - MIXED SENTIMENTS
This is a contrarian indicator and we become positive when sentiments are pessimistic and vice versa - DII flows continue to be strong on a 12-month basis. DII Flows have a structural tailwind in the form of
- Savings moving from Physical to Financial assets
- Emerging ‘SIP’ investment culture
- EPFO Equity investments
- FII Flows continue to remain weak. FII Flows have been muted for the last 3+ years -> since Oct-21 at negative Rs. -62,000 Crs vs DII Flows at Rs. 10.9 lakh Crs. This is also reflected in the FII ownership of NSE Listed Universe which is currently at its 10 year low of 17.6% (peak ownership at ~22.4%). This indicates significant scope for recovery in FII inflows.
- Periods of weak FII flows have historically been followed by strong equity returns over the next 2-3 years (as FII flows eventually come back in the subsequent periods).
- IPOs – Sentiments has slowly started to revive with most recent IPOs getting oversubscribed. But no signs of euphoria except for the SME segment.
- Past 5Y Annual Return is at 15% (Sensex TRI) – lagging with underlying earnings growth at 17% and nowhere close to what investors experienced in the 2003-07 bull market (45% CAGR)
- Overall the sentiments are mixed and we see no signs of ‘Euphoria’
FI Fixed Income View: Fiscal Consolidation continues but market borrowing slightly above expectation -> Neutral for Debt Markets
Fiscal Consolidation on track..
The Fiscal Deficit for FY26 at 4.4% of GDP adheres to the fiscal glide path. New Fiscal Consolidation roadmap to bring down debt to 50% of GDP by Mar-2031 from an estimated 57.1% in FY25 and 56.1% by FY26. Bond Markets will like the deficit number and medium term investors will appreciate the debt / GDP framework.
However market borrowing is marginally higher than expectation
Net Market Borrowing in FY26 is at INR 11.5 lakh crores is slightly above market expectation (vs 11.1 lakh crores in FY25) but we do not see any significant impact on the bond yields.
Overall, we expect yields to gradually come down over the next 12-18 months as inflation approaches target and as RBI starts rate cut cycle.
Why do we expect yields to come down?
- Inflation under control: India’s Dec-24 CPI inflation at 5.2% is within the RBI’s tolerance band(2-6%). Core CPI (excl Food & Energy) remains low at 3.6%. RBI’s inflation estimates for FY25 is at 4.8%.
- Elevated Interest Rates well above expected inflation: Repo Rate at 6.50% is comfortably above the projected inflation (4.8% for FY25) – this leaves the real policy rates at an elevated 170 bps giving enough room for RBI to reduce interest rates by ~50-75 bps over time.
- FED has started the interest rate cut cycle: Rates have been cumulatively brought down by 100 bps led by concerns of global growth slowdown & signs of lower US inflation. However, the Fed has maintained the interest rate on hold in the recent meeting (30-Jan-2024).
- Favorable Demand-Supply Equation:
- Higher Demand -> Higher FII inflows as Indian Government Bonds have been included in JP Morgan’s global bond market index and in Bloomberg’s Emerging Market Index + possibility of inclusion in FTSE indices.
- Comfortable Supply -> Gross Market Borrowing in FY26 is comfortable at 14.8 lakh crores vs 14.1 lakh crores in FY25.
How to invest?
3-5 year bond yields (GSec/AAA) continue to remain attractive.
We prefer debt funds with
- High Credit Quality (>80% AAA exposure)
- Short Duration or Target Maturity Funds (3-5 years)
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