Global financial services firm Citi said India’s FY27 Union Budget reinforces macro stability and strategic sector priorities, even as elevated borrowing and liquidity constraints pose risks for bonds and equities. In its multi-asset review, Citi said the government’s fiscal stance remains broadly conservative, with the fiscal deficit targeted at 4.3% of GDP in FY27, compared with 4.4% in FY26, alongside a continued push toward capital expenditure-led growth.
Citi estimates around Rs 1 lakh crore in spending compression in FY26 to remain within fiscal targets, while noting that nominal GDP growth assumptions of 10% appear conservative. Capital expenditure growth has been budgeted at 11.5% for FY27, with a strong tilt toward defence, renewables and state government capex. Defence capex alone is projected to rise 17-18%, while subsidies are expected to decline by 0.16% of GDP, accounting for roughly half of total spending compression.
As a result, the expenditure-to-GDP ratio is projected to fall for the sixth consecutive year, underscoring the government’s longer-term focus on fiscal consolidation.
Borrowing and Liquidity: Key Risk Area
Despite the modest narrowing of the deficit, Citi flagged the government’s borrowing programme as a potential pressure point. Gross market borrowing is pegged at Rs 17.2 trillion in FY27, with net borrowing at Rs 11.7 trillion, signalling continued dependence on open market operations (OMOs) by the Reserve Bank of India.
Citi cautioned that the absence of strong incremental demand for government securities could keep pressure on bond yields, particularly if the balance of payments deficit persists. It added that sustained borrowing may also transmit into further rupee depreciation pressures.
Equity View: Capex Winners, Financials Lag
On equities, Citi said the budget’s emphasis on public capex, especially defence manufacturing, is supportive for select industrials. Incentives tied to defence procurement, PLI-linked sectors, and infrastructure-related segments are seen as positives.
However, the brokerage flagged negatives for brokers, exchanges, PSU banks and wire stocks. The increase in securities transaction tax (STT) on equity options is expected to weigh on retail sentiment, even as recent market corrections may cushion the immediate impact.
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