As the Union Budget for FY26 is set to be presented on February 1, followed by the Reserve Bank of India’s monetary policy review on February 6, policymakers face a mixed economic landscape marked by divergent signals across key indicators, according to a report by HSBC. The global banking and financial services firm said the forthcoming Budget is likely to strike a careful balance between reform and fiscal restraint. 

According to the report, recent data points have offered a confusing read on the economy, with only early signs of an uptick in credit growth and sector-specific capital expenditure. Making this recovery broad-based remains a key policy challenge. Against this backdrop, the report said the government is expected to anchor its Budget strategy around two core pillars, restraint in spending and renewed reform momentum. 

Centre likely to adhere to fiscal consolidation road map 

Despite a notable shortfall in tax revenues, HSBC expects the Centre to adhere to its fiscal consolidation road map and meet its FY26 fiscal deficit target of 4.4% of gross domestic product. The report said revenue losses stemming from tax rate cuts are likely to be partially offset by robust dividend transfers from the Reserve Bank of India and public sector undertakings, along with curbs on current expenditure. Looking ahead, pruning and rationalisation of government schemes could help further reduce spending in FY27, with HSBC forecasting a fiscal deficit of 4.2% of the GDP. 

Govt’s net borrowing requirement may remain unchanged at ₹11.5 trillion in FY27 

On the borrowing front, the report expects the government’s net borrowing requirement to remain unchanged at ₹11.5 trillion in FY27. However, a high redemption burden — even after accounting for potential debt switches — is expected to push gross market borrowing to around ₹16 trillion. HSBC said this increase should remain manageable as borrowing growth is likely to stay below nominal GDP growth. 

The report pointed out the fiscal impulse is expected to be near-neutral despite continued consolidation. This would be supported by a relatively modest pace of fiscal tightening and elevated RBI dividend receipts. According to the report, the consolidation path remains aligned with the Centre’s objective of meeting its public debt target by FY31. 

State governments’ debt ratios may rise 

However, the outlook for state finances appears less reassuring. HSBC cautioned that state government debt ratios could rise over the next few years due to the absence of a similar consolidation strategy.  

On reforms, HSBC expects them to feature prominently in the Budget. Domestically, the report anticipates continued deregulation by the Centre and states, targeted manufacturing incentives for smaller firms, diversified capital expenditure support through higher capex loans to states, and rationalisation of subsidies and centrally sponsored schemes. Externally, the Budget may focus on rationalising customs duties, easing non-tariff barriers, and further opening sectors to foreign direct investment.