These sectors are projected to outperform in 2026

As we navigate the last quarters of FY 2025-26, the Indian market is witnessing a decisive shift in leadership. This article analyzes which sectors are projected to outperform in 2026, driven by the landmark “GST 2.0” reforms of September 2025 and the consumption boost from the Union Budget’s tax relief. We examine why Banking (BFSI), Defense, and the resurgent Consumption theme are leading the charge, while IT prepares for a value-led recovery in FY27. Our analysis, backed by PL Capital’s proprietary research, suggests a Nifty target of 29,000 by December 2026, supported by a robust 7.3% GDP growth forecast.

As of December 2025, the Indian equity market stands at a fascinating juncture. The Nifty 50 has scaled the 26,000 peak, fueled by a “Goldilocks” scenario of 7.3% GDP growth (RBI revised forecast) and benign inflation. But the real story isn’t just the index level—it’s the rotation beneath the surface. For investors asking which sectors are projected to outperform in FY 2025-26, the answer lies in a powerful convergence of policy tailwinds and earnings momentum.

The game-changer arrived in September 2025 with the GST Council’s “GST 2.0” overhaul, which slashed rates on key consumer durables and automobiles. Combined with the Budget 2025 income tax relief (zero tax up to ₹12 lakh), this has unleashed a wave of disposable income, directly benefiting consumption-linked sectors. Meanwhile, the Defense and Capital Goods sectors continue their structural bull run, powered by record export orders and government capex.

At PL Capital, we believe the “easy money” phase of broad market rallies is evolving into a stock-picker’s market where sectoral allocation is critical. Let’s dive deep into the five engines driving India’s growth story in FY 2025-26.

1. Consumption: The “GST 2.0” Supercycle

If you are looking for the most immediate beneficiary of recent policy shifts, look no further than the Consumption sector. For years, rural demand was the missing piece of the puzzle. That changed in FY 2025-26.

The Twin Turbo Effect

Two major policy interventions have reignited this space:

1. Income Tax Relief: As per Union Budget 2025, the effective tax-free income limit was raised to ₹12 lakh under the New Tax Regime. This put an estimated ₹35,000–₹50,000 of additional annual disposable income in the hands of the middle class.
2. GST Rationalisation: In September 2025, the GST Council reduced rates on two-wheelers, entry-level cars, and air conditioners from 28% to 18%. This 10% direct price drop has triggered a festive season sales boom in Q3 FY26.

Rural vs. Urban Dynamics

Data from NielsenIQ for Q2 FY26 confirms a trend reversal: Rural volume growth clocked 8.4%, significantly outpacing urban growth at 4.6%. This “rural outperformance” is a classic early-cycle signal for FMCG and entry-level auto stocks.

Data Source: NielsenIQ Q2 FY26 Report, GST Council Notification Sept 2025.

“The consumption story in India has shifted from ‘premiumisation’ to ‘mass recovery’. The GST cuts have effectively democratized access to durables, creating a multi-year runway for volume growth.”
— Amnish Aggarwal, Director – Research, PL Capital

2. Banking & Finance (BFSI): The Steady Compounder

While consumption grabs headlines, the Banking, Financial Services, and Insurance (BFSI) sector remains the earnings engine of corporate India. As of December 2025, the Nifty Bank index has delivered a solid 10% YTD return, but valuations remain surprisingly reasonable.

The Credit Growth Engine

Despite a high base, credit growth for FY 2025-26 is tracking at 12.5%–13% (Source: CareEdge/ICRA). What’s different this time? It’s not just retail loans. Corporate capex borrowing has picked up, driven by the steel, cement, and renewable energy sectors.

Asset Quality Gold Standard

Indian banks are currently operating with the cleanest balance sheets in two decades. As per RBI’s Financial Stability Report (Dec 2025), Gross Non-Performing Assets (GNPA) have fallen to a historic low of 2.3%. This “clean slate” allows banks to lend aggressively without the fear of bad loans haunting them—a stark contrast to the 2016-2018 cycle.

The Insurance kicker

The September 2025 GST reforms also exempted/reduced GST on life and medical insurance premiums. This has been a massive trigger for insurance companies, making policies 15-18% cheaper for end consumers and boosting persistence ratios.

3. Defense & Manufacturing: The Structural Fortress

Defense has been the “darling” sector of the last three years, and skeptics keep calling for a top. However, the data suggests the cycle is far from over. In FY 2025-26, the narrative has shifted from “import substitution” to “export powerhouse.”

Beyond the Order Book

Indian defense majors are no longer just serving the Indian armed forces. As of late 2025, defense exports have hit record highs, with significant orders from Armenia, Philippines, and African nations. The government’s target of ₹50,000 crore in annual defense exports by FY29 looks increasingly achievable.

Manufacturing PMI Strength

India’s manufacturing PMI stood at a robust 59.3 in August 2025 (Source: HSBC PMI Data), signaling 17-year high expansion rates. This isn’t just defense; it’s electronics (mobile manufacturing), railways, and green energy components. The PLI (Production Linked Incentive) schemes are now maturing, with companies moving from “assembly” to “component manufacturing.”

Investor Note: Valuations in defense stocks are rich (PE > 50x in many cases). At PL Capital, we recommend a “Buy on Dips” strategy rather than chasing momentum at all-time highs.

4. IT Services: The Contrarian Value Bet

Is it time to look at IT again? The sector has been the underperformer of 2025, with the Nifty IT index delivering muted returns (-10% YTD in mid-2025). However, smart money is starting to accumulate.

The FY27 Recovery Thesis

While FY26 growth is pegged at a modest 1%–3% (Source: ICRA/Goldman Sachs), the outlook for FY27 is brightening. Global central banks have started cutting rates, which typically leads to a revival in discretionary tech spending by US/EU clients after a 6-9 month lag.

The AI Pivot

Indian IT majors are reporting that “AI Proof of Concepts” (PoCs) are finally converting into large deals. As companies move from experimenting with GenAI to deploying it at scale, Indian IT service providers are the natural execution partners. We see IT as a classic “Value” play for patient investors willing to hold for 18-24 months.

5. Renewable Energy: The Power Supercycle

India’s power demand is growing at 8% annually, double the pace of the last decade. To meet this, the government has accelerated its push for 500 GW of non-fossil capacity by 2030. As of December 2025, installed renewable capacity stands at nearly 452 GW.

Solar PLI: The Next Leg

While module prices crashed in 2024-25 due to Chinese oversupply, Indian manufacturers protected by tariff barriers (ALMM) are stabilizing. The focus is now on the “Solar PLI” beneficiaries—companies that are integrating backwards into cells and wafers. This is a high-beta sector suitable for aggressive investors.

Conclusion

The question of which sectors are projected to outperform in FY 2025-26 has a clear answer: Consumption and Banking are the twin pillars of this market phase. The “GST 2.0” reforms have breathed new life into the consumer story, while banks continue to deliver steady, compounding growth. As an investor, the key is to pivot from “momentum chasing” to “earnings quality.” The Nifty target of 29,000 is in sight, but the path will be paved by these specific sectoral winners.

Ready to restructure your portfolio for FY 2025-26? Open your PL Capital account and get access to our top-rated research reports and expert advisory to navigate this bull market.

FAQs on Sectoral Outlook FY 2025-26

1. Which sector benefits most from the GST rate cuts in 2025?

The Consumer Durables and Automobile sectors are the biggest beneficiaries. The reduction of GST from 28% to 18% on two-wheelers, entry-level cars, and air conditioners has directly lowered prices, boosting volume growth significantly in the second half of FY 2025-26.

2. Is the IT sector a good buy in December 2025?

Yes, for long-term investors. While FY26 growth remains muted (1-3%), valuations have corrected to attractive levels. With global interest rates softening, a strong recovery in discretionary spending is projected for FY27, making current levels a good entry point for accumulation.

3. Why are Defense stocks still recommended despite high valuations?

Defense stocks are supported by a structural shift in India’s role from an importer to an exporter. With defense exports hitting record highs and a government target of ₹50,000 crore by FY29, the earnings visibility justifies premium valuations, though a “buy on dips” approach is safer.

4. How does the new income tax limit of ₹12 lakh affect the market?

The increased tax-free limit of ₹12 lakh (under the New Regime) has increased disposable income for the middle class by ₹35,000–₹50,000 annually. This surplus is largely flowing into discretionary consumption (travel, durables, autos) and financial savings (SIPs), benefiting these respective sectors.

5. What is PL Capital’s Nifty target for the next 12 months?

Based on our proprietary research and earnings growth projections of 12-14% for Nifty companies, PL Capital has a 12-month target of approximately 29,000 for the Nifty 50 index by December 2026, assuming continued policy stability and normal monsoons.