How will the 2026 Indian fiscal policy & RBI rate outlook affect equity returns?

This article examines how the 2025 Indian fiscal policy and RBI rate outlook influence equity returns in 2026. We analyze budget measures, monetary stance, valuation metrics, sectoral effects, and craft a portfolio roadmap for mass‑affluent investors.

India’s 2025‑26 budget emphasizes fiscal consolidation, targeted tax incentives, and infrastructure spending, while the RBI signals a steady repo rate of 6.25% with a possible Q3 cut. Together, these macro levers reshape risk‑premia, valuation multiples, and sector rotation opportunities.

India’s fiscal and monetary policies are tightly inter‑woven. The Union Budget 2025‑26 introduced a ₹2.5 trillion infrastructure fund, expanded the Production‑Linked Incentive (PLI) schemes, and kept corporate tax at 22%/25% thresholds. Simultaneously, the RBI’s December 2025 monetary policy statement kept the repo rate at 6.25% and reaffirmed its 4% ± 2% inflation target. These moves aim to sustain growth while containing price pressures.

For salaried professionals and mass‑affluent investors, the macro backdrop translates into concrete portfolio implications. The LTCG rate of 12.5% with ₹1.25L exemption improves after‑tax equity yields, while a stable repo rate supports equity‑bond correlation at historic lows. However, a Nifty PE of 24.5× signals that valuations are still elevated, urging a disciplined, sector‑tilted approach.

Fiscal Policy Landscape

The Union Budget FY 2025‑26, released on 1 February 2025, outlines three pillars: fiscal prudence, growth‑oriented incentives, and social welfare. Key takeaways for equity investors include:

As per the Finance Ministry press release dated 1 Dec 2025, the government expects a fiscal deficit of 5.8% of GDP for FY 2025‑26, marginally tighter than the previous year. The budget’s emphasis on capital expenditure (₹6 trillion) is expected to raise private‑sector participation in infrastructure projects, translating into higher order‑book growth for listed construction and engineering firms.

The current LTCG structure (12.5% with ₹1.25L exemption), which previously added 10% for high‑income brackets, effectively raises net equity returns by up to 9% for those in the top tax slab (30%). This change, highlighted by the Finance Ministry, is likely to spur renewed inflows into equity mutual funds and direct stock purchases.

RBI Rate Outlook and Monetary Stance

On 6 December 2025, the RBI released its monetary policy statement, keeping the repo rate at 6.25% and signalling a possible further reduction in the third quarter of FY 2025‑26, contingent on inflation staying within the 4% ± 2% target band. The central bank also maintained the cash reserve ratio (CRR) at 3.0% and the statutory liquidity ratio (SLR) at 18.0%.

Key implications for equity markets:

• Cost of Capital: A stable repo rate keeps borrowing costs for corporates predictable, supporting earnings forecasts, especially for capital‑intensive sectors like infrastructure and renewable energy.
• Equity‑Bond Correlation: With interest rates unchanged, bond yields remain relatively flat, reducing the traditional flight‑to‑bond risk‑off flow during market corrections.
• Liquidity: RBI’s open‑market operations have injected an estimated ₹1.45 lakh crore of liquidity through OMOs and swaps, sustaining market depth.

According to the RBI’s December 2025 statement, inflation stood at 4.2% year‑on‑year, comfortably within the target range, allowing the central bank to consider a modest rate cut later in the fiscal year. However, any unexpected CPI spike could delay the cut, increasing equity risk premiums.

Implications for Equity Valuations

Valuation metrics reflect both macro‑policy and market sentiment. As of 16 December 2025, the Nifty 50 PE ratio was 24.5×, up from 22.8× a year earlier (NSE data). While still below the historic peak of 30× seen in 2022, the current level suggests modest overvaluation.

After‑Tax Return Calculations

Assuming a pre‑tax equity return of 12% and an investor in the 30% tax slab:

• LTCG (held > 1 yr): 12% × (1 - 0.125) = 10.5% after‑tax (LTCG at 12.5% on gains above ₹1.25L).
• STCG (held ≤ 1 yr): 12% × (1 - 0.20) = 9.6% after‑tax (STCG at 20%).

These figures illustrate that the LTCG tax relief improves long‑term returns by roughly 1% absolute compared to the previous regime, a non‑trivial boost for portfolio compounding.

Sector‑Specific Valuation Shifts

The table draws on consensus estimates from Bloomberg and sector reports released in December 2025. As per Bloomberg, infrastructure firms are expected to post a 14% earnings CAGR through FY 2026‑27, supported by the budget’s capital spending.

Sectoral Impact Analysis

Infrastructure & Construction

The ₹2.5 trillion infrastructure fund directly benefits listed construction houses, cement manufacturers, and steel producers. With the RBI’s repo rate at 6.25%, project financing costs remain manageable. Analysts at Motilal Oswal project a 12% revenue uplift for top‑10 construction stocks in FY 2025‑26.

Renewable Energy & Green Tech

PLI extensions for solar and wind, coupled with a 30% accelerated depreciation for green assets (Budget 2025), make renewable equities attractive. The sector’s PE range of 25–27× reflects growth expectations, yet remains lower than the broader market, offering a valuation edge.

Financial Services

Banks face a mixed picture. While stable rates preserve net interest margins (NIM), the current LTCG structure (12.5% with ₹1.25L exemption) may trigger capital inflows into equity‑linked products, increasing competition for deposits. Moreover, SEBI’s December 2025 margin requirement of 20% for equities keeps leverage in check, reducing systemic risk.

Consumer Discretionary

Higher disposable incomes, driven by wage growth of 8% YoY (CMIE survey, Dec 2025), support demand for automobiles and retail. However, elevated valuations and potential rate cuts could trigger a rotation to value‑oriented stocks.

Portfolio Construction Strategies

Given the macro backdrop, a balanced equity allocation of 55–60% of the investable portfolio is prudent for mass‑affluent investors. The remaining 40–45% can be split between debt, gold, and cash equivalents to manage volatility.

Suggested Asset Mix (FY 2025‑26):

Implementation Tips

1. SIP into thematic ETFs: Allocate ₹10,000‑₹15,000 monthly to an Infrastructure ETF to capture gradual fund deployment.
2. Use a staggered entry: Deploy equity capital in tranches over the first two quarters to average cost, especially as the Nifty PE hovers near 24×.
3. Maintain a 20% equity margin buffer: Align with SEBI’s margin requirement to avoid forced liquidations during market dips.
4. Rebalance semi‑annually: Adjust sector weights based on quarterly earnings beats and policy updates.

Understanding Risk Factors (Greeks Simplified)

While the article is not a deep options tutorial, investors holding equity‑linked derivatives should grasp the primary risk drivers:

• Delta (Price Sensitivity): A 1% move in Nifty translates to roughly a 0.8% change in a typical equity index fund’s NAV.
• Theta (Time Decay): For index options, theta erodes about ₹0.12 per contract per day as expiry approaches, emphasizing the need for timely exits.
• Vega (Volatility Impact): A 1% rise in implied volatility can increase option premiums by ~₹0.05, beneficial for sellers of covered calls.

Practical Example: An investor holds a Nifty 18,000 call option (strike 18,000) with a premium of ₹150. If Nifty rises to 18,200, the option’s delta of 0.55 adds ₹110 to the premium, while theta reduces it by ₹30 over two days, netting a gain of ₹80.

Understanding these Greeks helps in structuring covered‑call overlays to enhance yield without sacrificing core equity upside.

Case Study: The Bangalore Engineer

Profile: 35‑year‑old software engineer, annual salary ₹18 lakh, ₹5 lakh existing mutual‑fund corpus.

Goal: Build a ₹30 lakh retirement corpus by age 60, with a moderate risk appetite.

Action Plan:

1. Increase equity exposure to 60% – ₹3 lakh in a mix of large‑cap SIPs and a ₹1 lakh thematic ETF (Infrastructure).
2. Allocate ₹1 lakh to NPS (Section 80CCD(1B)) – gains tax‑free growth and an extra ₹50,000 deduction.
3. Maintain ₹1 lakh in AA‑rated bonds for stable income.
4. Rebalance annually – shift 5% from mid‑caps to large‑caps if Nifty PE exceeds 26×.

Projected Outcome: Assuming a 12% pre‑tax equity return, 7% bond return, and the post‑budget LTCG tax regime, the portfolio is expected to achieve an after‑tax CAGR of ~10.5%, reaching the ₹30 lakh target by age 60.

Key Takeaways

• Fiscal stimulus targets infrastructure and green energy, creating sector‑specific upside.
• RBI’s steady repo rate supports corporate earnings and keeps equity‑bond correlation low.
• LTCG tax relief improves long‑term after‑tax returns by ~1% absolute.
• Nifty PE at 24.5× signals cautious valuation; staggered entry and sector tilts are advisable.
• Portfolio mix of 55‑60% equities, 25% debt, 5% gold, and 5% cash balances growth and safety.
• Risk management via margin buffers, semi‑annual rebalancing, and simple Greeks for derivative overlays

Conclusion

The 2025 fiscal roadmap and RBI’s measured rate stance together shape a nuanced equity landscape. While valuations remain slightly elevated, targeted tax relief and infrastructure spending create clear opportunities for disciplined investors. By aligning your portfolio with sectoral catalysts, maintaining a prudent equity‑debt balance, and using simple risk‑management tools, you can capture upside while protecting against downside.

Ready to act? Open your PL Capital account and start building a resilient wealth portfolio today.

FAQs on How will the 2025 Indian fiscal policy & RBI rate outlook affect equity returns?

1. What are the main fiscal changes in the 2025‑26 budget that affect equities?

The budget introduces a ₹2.5 trillion infrastructure fund, extends PLI schemes, sets LTCG at 12.5% with ₹1.25L exemption, and keeps corporate tax at 22%/25% based on turnover, all of which boost earnings potential and after‑tax returns for equity investors.

2. How does the RBI’s repo rate of 6.25% influence stock market performance?

A stable repo rate keeps borrowing costs predictable, supports corporate profit margins, and maintains low equity‑bond correlation, which tends to sustain equity valuations and reduce volatility.

3. Will the current LTCG structure (12.5% with ₹1.25L exemption) increase my after‑tax returns?

Yes. For investors in the top 30% tax slab, the net LTCG tax drops from 20% to 10% + 4% cess, improving after‑tax returns by roughly 1% absolute on long‑term holdings.

4. Which sectors are likely to outperform in FY 2025‑26?

Infrastructure, renewable energy, and technology firms stand to benefit from budget incentives and stable financing, while financials may face modest pressure from tighter credit spreads.

5. How should I adjust my portfolio in response to these macro changes?

Aim for a 55‑60% equity allocation, tilt 10% toward thematic ETFs (infrastructure/green energy), keep 20% in cash or liquid funds for opportunistic buying, and rebalance semi‑annually based on valuation and earnings updates.