Union Budget 2026: Real Estate Likely to Receive Major Support, Small Caps Set to Rebound
Pankaj Pandey, the Head of Retail Research at ICICI Direct, believes that the real estate sector may receive the most support in the upcoming Union Budget 2026. This is primarily due to the sector's substantial contribution to the GDP, its correlation with over 200 allied industries, and its status as the second largest employer after agriculture. Real estate's ripple effect on industries such as cement, steel, building materials, services, and logistics makes it a crucial sector for job creation and economic growth.
According to Pandey, affordable housing, which has been under significant stress, may receive relief measures in the budget. These measures could include expanding the definition of affordable housing in terms of value and unit sizes. Other potential measures might involve increasing the home loan interest deduction limit, enhancing credit access for developers, offering incentives for first-time buyers, and streamlining regulatory processes through single-window clearances. Additionally, the government might grant infrastructure status to real estate, incentivize green construction, and promote rental housing to further boost the sector.
Pandey also expects the small-cap index to rebound in 2026. With the small-cap index down approximately 6% in 2025 and about 13% from its all-time high, the odds are in favor of a recovery. Historical data shows that there is a low probability (14%) of small caps correcting in two consecutive years. Therefore, the likelihood of small caps resuming their upward trajectory and delivering healthy double-digit returns in 2026 is high.
The government's focus on employment generation is another key area of interest. Real estate's extensive impact on allied industries means that measures to boost this sector could significantly enhance job creation. For instance, the Indian Textile sector, which employs around 45 million people, is currently facing challenges due to high tariffs imposed by the US on Indian textile exports. Any relief schemes or tax concessions for setting up new units, along with the permanent removal of the 11% cotton import duty, could alleviate cost pressures and support employment objectives.
In terms of the broader market, Pandey notes that the first quarter of 2026 is likely to see continued consolidation due to ongoing trade tariffs and geopolitical tensions. However, as the year progresses, investors are expected to focus more on corporate earnings and macroeconomic growth. The banking sector, particularly private and mid-cap banks, is anticipated to benefit from benign asset quality trends, lower credit costs, and improved loan granularity, which are reducing earnings volatility and supporting sustainable returns on assets.
Regarding the auto and metal sectors, Pandey acknowledges their strong performance over the past year, with the Nifty Auto index up 21% and the Nifty Metals index up 36%. While the sectors are not a blanket buy, there are still select opportunities. For instance, the Passenger Vehicle segment in the auto industry and ferrous players in the metals sector continue to be attractive due to their growth potential and earnings support from safeguard duties.
Finally, Pandey discusses the Federal Reserve's recent actions and future projections. The Fed delivered its third consecutive 25-basis-point rate cut in December, but the probability of another rate cut in January is low. The Fed has raised its growth expectations for 2026 and remains uncertain about the inflation trajectory, making it unlikely to cut rates in the near term.
In conclusion, the real estate sector and small-cap stocks are poised for significant support and growth in 2026, while the broader market and specific sectors like banking, auto, and metals also present promising opportunities for investors.
