Why Morgan Stanley stayed overweight on Indian stocks post Budget 2026; prefers these 3 sectors

Budget 2026: Morgan Stanley said it remains 'overweight' on Indian equities after the Union Budget 2026 announcements on February 1.

As per the global brokerage, the Union Budget 2026 carefully balances fiscal consolidation with growth support. It observed that the Budget blends cyclical recovery measures with long-term structural reforms that could strengthen India’s medium-term growth trajectory through higher capital expenditure, manufacturing competitiveness, and services sector incentives.

“The Budget balances debt to GDP reduction with slow paced fiscal consolidation and support for growth through cyclical and structural measures. We remain constructive on Indian equities – Overweight Financials, Consumer Discretionary and Industrials,” said the brokerage.

It noted that the Budget’s growth orientation was visible in the strong thrust on capital expenditure and sectoral priorities such as semiconductors, rare earth magnets, industrial clusters, data centres, and services exports.

Budget 2026: Morgan Stanley on Macro Announcements

Morgan Stanley highlighted that the government has opted for the slowest pace of fiscal consolidation since the pandemic while still maintaining a credible path toward reducing the debt-to-GDP ratio. The fiscal deficit for FY27 is budgeted at 4.3% of GDP compared to 4.4% in FY26 Revised Estimates, while central government debt is projected at 55.6% of GDP.

The brokerage viewed this as a pragmatic approach that preserves growth momentum without compromising fiscal discipline.

It alsi pointed out that total capital expenditure is set to rise 11.5% YoY in F2027, while defence capex is budgeted to increase 18% YoY. Importantly, central government capex is maintained at 3.1% of GDP, similar to FY26 Revised Estimates, ensuring continuity in public investment momentum.

The brokerage expects this to provide cyclical support to growth at a time when private sector capex is gradually improving.

Morgan Stanley said, “We expect the Budget to support cyclical growth recovery through its emphasis on capex (central government capex stays at 3.1% of GDP in F27, similar to F26 RE) and to strengthen India’s structural growth trend through steps that improve manufacturing competitiveness and services sector attractiveness.”

The brokerage concluded that the combination of sustained capex, structural reforms in manufacturing and services, and a calibrated fiscal path could support earnings growth into F2027.

It reiterated its Overweight stance on Financials, Consumer Discretionary and Industrials, expecting these sectors to benefit the most from the policy direction laid out in the Budget.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.