As Budget 2026 comes closer, conversations across Dalal Street are getting louder—but cautious. The Indian stock market is not struggling because businesses are broken. It’s struggling because confidence is thin. And when confidence slips, money follows. Or rather, leaves.
Over the last year, Indian equities have quietly fallen behind global peers. Not with a crash. But with persistent selling pressure—mostly from foreign portfolio investors (FPIs). That context is important to understand why Budget 2026 has suddenly become the focal point of market sentiment.
Market Performance: A Year of Uneven Returns and Heavy Selling
On paper, Indian markets still delivered positive returns last year.
The BSE Sensex rose nearly 9%, marking its 10th straight year of gains. But that number hides a bigger story.
Several Asian markets delivered much stronger returns, ranging between 16% and 68%, leaving Indian equities looking less competitive in relative terms.
This underperformance wasn’t driven by weak balance sheets or collapsing demand. It was driven by sentiment—and more specifically, by foreign money moving out.
Key market indicators show:
- FPIs sold ₹166,286 crore in 2025
- They were net sellers in 8 out of 12 months
- The trend has continued into January 2026
FPI Sell-Off: Numbers That Shaped Market Mood
According to NSDL data, FPIs have already net sold ₹33,598 crore worth of Indian equities in January so far.
That marks the highest monthly outflow since August 2025.
The impact was immediate:
- Nifty fell 2.5% in the week ended 23 January
- Nearly ₹16 lakh crore in market capitalisation was wiped out in just one week
For traders and long-term investors alike, the message has been clear—foreign flows matter, and right now, they’re missing.
Why Budget 2026 Matters to Market Sentiment?
With selling pressure continuing, attention has shifted to Budget 2026 as a possible sentiment reset point.
One of the biggest demands doing the rounds is a reduction in Long-Term Capital Gains (LTCG) tax on equities.
Market participants believe tax policy plays a role in shaping post-tax returns, especially for global investors comparing India with other emerging markets.
Capital Gains Taxes: A Quick Look at the Numbers
Here’s how equity taxation has evolved:
- Budget 2018
- LTCG tax reintroduced at 10%
- Exemption limit: ₹1 lakh
- 2024 changes
- LTCG tax raised to 12.5%
- Exemption increased to ₹1.25 lakh
- STCG tax increased to 20% from 15%
These changes came at a time when global interest rates were already high and emerging markets were competing aggressively for capital.
LTCG Cut and Market Flows: What’s Being Discussed?
Ahead of Budget 2026, expectations in the market revolve around:
- Reducing LTCG tax back to 10%
- Rolling back Securities Transaction Tax (STT)
The argument is simple. Lower friction improves appeal. Better appeal supports participation.
However, it’s important to separate sentiment support from flow reversal.
A tax tweak may help reduce post-tax drag, but it does not change broader drivers like:
- Currency movements
- Trade uncertainty
- Earnings momentum
Budget 2026, therefore, is being watched less as a trigger—and more as a signal.
What’s Really Driving FPI Behaviour?
The selling pressure through 2025 and early 2026 has coincided with:
- A weakening Indian rupee
- Lack of clarity on India–US trade discussions
- Slowing earnings growth
These factors together have shaped overseas allocation decisions far more than tax rates alone.
That context matters when reading expectations around Budget 2026. Policy can improve comfort, but flows usually respond to a bigger picture.
Why Market Reaction Has Been So Sharp?
The recent sell-off hasn’t been loud—but it’s been consistent.
Steady withdrawals over months reduce liquidity. Lower liquidity increases volatility. That’s how relatively small weekly declines end up erasing ₹16 lakh crore in market value.
It’s not panic selling. It’s patient withdrawal.
Summary: Budget 2026 as a Sentiment Checkpoint
Budget 2026 is shaping up to be less about dramatic announcements and more about course correction.
Key takeaways:
- Indian markets delivered 9% returns, but lagged global peers
- FPIs sold over ₹1.66 lakh crore in 2025
- January 2026 alone saw ₹33,598 crore in outflows
- Market cap erosion reached ₹16 lakh crore in one week
- Capital gains taxes remain a central discussion point
For now, the market waits. Not for a miracle. But for signs that policy, sentiment, and capital flows might finally start moving in the same direction.
Budget 2026 won’t rewrite market history overnight. But it could decide how confident investors feel writing the next chapter.
Source: Livemint
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