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Why Stock Markets Dip Before Union Budgets and What to Expect in 2026

Historical data from 2010-2022 reveals a pattern of stock markets, particularly the Nifty, trading lower in the week preceding the Union Budget, with an average negative return of 0.52%. This pre-budget weakness is driven by investor anxiety over potential policy surprises and elevated volatility, with budget day itself seeing an average intraday swing of 2.65%. For the 2026-27 budget, market expectations focus on increased capital expenditure in infrastructure and defence, alongside a balancing act between fiscal prudence and growth stimulus. However, analysts warn of risks including geopolitical tensions, fiscal slippage, and overvaluation concerns that could impact the market's trajectory post-budget.

Key Points: Stock Market Trends Before Union Budget: Analysis & 2026 Outlook

  • Pre-budget Nifty returns average -0.52%
  • Post-budget week sees average 1.36% gain
  • High budget day volatility of 2.65% intraday range
  • FY27 fiscal deficit projected at 4.2-4.3% of GDP
  • Key sectors: Defence, Infrastructure, PSU Banks
2 min read

Why stock markets often trade lower ahead of Union Budgets

Analysis shows markets often fall before the Union Budget due to policy fears. See 2026 expectations, risks, and post-budget rebound trends.

"For the Union Budget 2026, expectations centre on balancing fiscal prudence with growth stimulus amid global headwinds - Rahul Sharma, JM Financial"

New Delhi, Jan 25

As the government prepares to present the Union Budget 2026-27, data from 2010-2022 shows that markets often trade lower ahead of the event due to fear of policy surprises, though post-budget rebounds are common - with an average 1.36 per cent gain in the following week, according to market watchers.

This pre-budget weakness is attributed to elevated volatility, as seen in the average 2.65 per cent intraday trading range on budget day itself, they said.

Over the past 15 years, the average return for Nifty one week before the budget has been negative at -0.52 per cent, with the index closing higher only on 8 occasions.

This pattern aligns with broader trends, where Nifty posted negative returns in the month preceding the budget in four out of the last five years, including a drop in January 2025.

"For the Union Budget 2026, expectations centre on balancing fiscal prudence with growth stimulus amid global headwinds like US tariffs under President Donald Trump," said Rahul Sharma, Director, Head - Technical and Derivative Research, JM Financial Services Ltd.

Key anticipations include increased capital expenditure on Infrastructure, Defence, and Railways to shield the economy from external shocks, with a hike in defence allocation.

Industry bodies seek boosts for MSMEs, manufacturing, green energy, AI and exports through incentives like faster GST refunds and investments in logistics.

"Fiscal deficit is projected at 4.4 per cent of GDP, with emphasis on job creation, rural demand, and sustainable development to propel India toward a $5 trillion economy," he mentioned.

However, several risks could impact market reactions. Budget day volatility remains high, with possible potential sell-offs if stimulus falls short or fiscal targets slip, potentially raising bond yields and tightening liquidity.

Geopolitical tensions, currency fluctuations, and global trade disruptions pose external threats, while domestic execution delays in policies could erode investor confidence, said analysts.

Overvaluation concerns, FII outflows, and an AI bubble burst are additional headwinds that might derail Nifty's rally toward 29,000 in 2026.

"Investors are advised to maintain cash positions until post-budget clarity emerges, focusing on sectors like defence and PSU Banks for selective opportunities," said Sharma.

CareEdge Ratings expects fiscal deficit to GDP to be contained at 4.4 per cent in FY26.

"Fiscal deficit is likely to be budgeted at 4.2-4.3 per cent in FY27. We expect gross borrowing to be in the range of Rs 16-17 trillion in FY27 and net borrowing likely at Rs 11.5-12 trillion," the report mentioned.

- IANS

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Reader Comments

P
Priya S
The focus on defence and infrastructure is good for long-term growth, but what about immediate relief for the middle class? High inflation is eating into our savings. I hope the budget has something for salaried taxpayers beyond just standard deduction tinkering.
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Aman W
The projected borrowing of Rs 16-17 lakh crore is massive! While capex is necessary, this will crowd out private investment and keep interest rates high for home and car loans. The fiscal deficit target seems optimistic given the global headwinds.
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Sarah B
As an NRI investor, the volatility around the budget is a known factor. The key is the government's commitment to the fiscal glide path. If they stick to 4.4% and outline a clear plan for AI and green energy, FII sentiment will improve post-budget. Execution is everything.
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Karthik V
Finally some data-driven analysis instead of speculation! The average 1.36% gain post-budget is reassuring. It means the smart money uses the fear to enter. MSME incentives and faster GST refunds are critical needs for job creation. Hope the FM delivers.
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Nisha Z
While the article is informative, I respectfully disagree with the advice to just focus on defence and PSU banks. This creates a herd mentality. What about agriculture and rural demand? A good monsoon and higher MSP can boost the economy more sustainably. The budget needs a balanced approach.

We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.

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