Budget has delivered the tax break, but will the markets bite?


In the Union budget presented on 1 February, finance minister Nirmala Sitharaman announced raising the income tax exemption limit to 12 lakh from 7 lakh, which has been touted by many as a potential game-changer. While analysts foresee a boost in demand for consumer discretionary goods and durables, the real question is whether this will translate into a sustained rally in the broader market. For now, the champagne remains on ice.

Read this | Budget 2025 | A 1 trillion largesse for India’s middle class

Despite initial enthusiasm, experts are urging caution. They point to high valuations in most sectors, which could dampen market optimism. According to a recent report by Motilal Oswal Financial Services, nearly 66% of sectors are still trading at a premium to their historical averages, despite heavy corrections over the last four months. This, they argue, will limit the potential for a broad-based market rally, even if the consumption revival story holds true.

Industry experts acknowledge that increased middle-class spending could eventually spark a virtuous cycle of economic growth via the multiplier effect. But given current market volatility, they remain cautious.

“The focus remains on quality and growth at a reasonable price. Domestic macroeconomic risks persist, while we are taking cues from the US market on a daily basis. So at least for one quarter it is recommended to remain invested in high quality growth stocks which are available at reasonable prices,” noted Neeraj Chadawar, head of fundamental and quantitative research at Axis Securities.

Selective betting

For now, investors are selectively betting on India’s consumption revival story, with a particular focus on the consumer discretionary sector. The government’s decision to raise the income tax exemption limit is expected to increase net incomes by 2-7% for India’s upper middle class, according to Emkay Global’s post-budget report.

“Whenever consumers have received this type of thrust to their incomes, they have incrementally spent more on discretionary and durable items than on staples,” Chadawar said. “We think fashion retail, QSR (quick service restaurants), hotels, travel and tourism, footwear and white goods companies will see a volume uptick once we progress towards Q1 and Q2 of FY26.”

This sentiment is mirrored by index performance. The BSE consumer durables and consumer discretionary indices held their post-budget gains, returning around 1.7% and 0.1%, respectively. In contrast, the FMCG index, the second-best performer on budget day, has since fizzled out, becoming the worst-performing index.

Read this | Budget 2025: Income tax cuts extend FMCG stocks’ winning streak

“Their (fast-moving consumer goods companies’) valuations are quite high. Hence, they remain unattractive, because we do not see any material upside in their volumes post budget,” highlighted Devarsh Vakil, head of prime research at HDFC Securities.

Premiumization play

One unexpected bright spot amid the consumption slowdown is premiumization. The budget is poised to accelerate this trend.

“The budget has increased the affordability for the urban consumer. They will start consuming better products rather than consuming more. They will also be able to absorb more price hikes in the future. So, we can expect some respite in margins (profitability) but not in volumes,” said Vakil.

Looking ahead, Nestle India’s projection of 60 million new middle- and high-income consumers by 2030 suggests a strong future demand for premium products. However, Nestle India chairman and managing director Suresh Narayanan, while highlighting a 7,500 crore premiumization opportunity, also acknowledges the ongoing urban demand slowdown for packaged goods, exacerbated by slow wage growth and unemployment.

Meanwhile, FMCG companies have struggled with weak urban demand for several quarters, with only limited support from a sluggish rural recovery. Although experts anticipate a recovery in rural demand for consumer staples, their focus remains firmly on the discretionary and durables sectors, where the potential for demand growth is more pronounced.

Ensuing credit boom

As consumption growth takes root in select sectors, analysts expect a rise in credit demand, especially from non-banking financial companies (NBFCs). Bajaj Finance, which has significant exposure to unsecured consumer durable loans, has already seen a 9% increase in the past five days. Similarly, SBI Cards and Payment Services has risen by 5% during this period.

Market participants also anticipate broad-based credit growth, bolstered by the government’s fiscal consolidation target of 4.4% of GDP in FY26 and the potential for an interest rate cut by the Reserve Bank of India by April.

“We believe 30-40% of the portfolio should be in the banking and finance sector right now. We easily see a 20-25% growth in their operating incomes and valuations are comparatively much lower than their historical average,” Vakil added.

Rally dreams on hold

Although interest in auto and real estate stocks has spiked due to expectations of increased demand for two-wheelers, entry-level cars, and affordable housing in a cheaper credit environment, experts remain cautious. They believe these trends will be short-lived unless corporate earnings improve in the coming quarters.

“A runaway rally in the stock market would not materialize until there are significant upgrades in FY26 or FY27 earnings estimates,” noted Mohit Khanna, fund manager at Purnartha PMS. “While we expect earnings to recover in FY26, albeit on a low base, any earnings upgrade is unlikely.”

Even though the Q3 FY25 earnings of Motilal Oswal’s coverage universe align with its modest expectations, forward earnings revisions remain the weakest in recent history, the brokerage noted in the report cited earlier.

“Downgrades far outpace upgrades, especially in our non-Nifty-50 universe. The Nifty-50 is likely to clock a modest 5% EPS (earnings per share) growth in FY25 following a 20%-plus compound annual growth rate during FY20-24,” it added.

India Inc.’s weak earnings growth in a typically strong quarter points to a slowing economy. While return expectations for 2025-26 have moderated significantly, global headwinds in forms of tariffs and trade wars are further souring market sentiment.

Also read | Early birds warn of a stressful Q3

“Staying on the path of fiscal consolidation is positive for macro stability, but growth is likely to remain weak in coming quarters. Meanwhile, equity valuations remain elevated, and this budget might not be enough to reverse the downbeat sentiments in the market,” highlighted a recent HSBC Global Research.


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