What is the defence sector budget this year, and which stocks may benefit?

Synopsis: Budget 2026 allocated Rs 7.85 lakh crore to the defence sector, up 15% YoY, easing initial market cover no speech mention. Stocks like Bharat Electronics Ltd, Hindustan Aeronautics Ltd, and others recovered as investors focused on spending continuity.

The Union Budget 2026–27 delivered mixed cues for the defence sector, initially unsettling markets due to the absence of any explicit mention in the Finance Minister’s speech. However, detailed budget numbers later reaffirmed the government’s long-term commitment to defence spending. The allocation underscored continuity over rhetoric, prompting a recovery in defence stocks and highlighting the market’s preference for actual fiscal support over headline announcements.

About the Defence allocation 

The Union Budget for 2026-27 has allocated Rs 7.85 lakh crore to the defence sector, thus reiterating the government’s commitment to the country’s security over the long term, even in the absence of any sector-specific announcements in the Budget speech. The allocation has increased 15% YoY when compared to the previous year’s allocation of Rs 6.81 lakh crore.

The allocation trend has given defence the much-needed visibility in terms of research and development, modernisation, and equipment procurement, thus supporting the order books of domestic defence companies and the overall ‘Make in India’ initiative. Although the markets started with a cautious tone in the absence of any special mention, the defence sector’s allocation trend helped the sector bounce back, with investors taking cues from the allocation trend.

The defence space saw initial selling pressure during the budget announcement, as there was no specific or explicit mention of defence manufacturing, capital procurement, or new flagship schemes announced by Finance Minister Nirmala Sitharaman. This lack of headline announcements resulted in disappointment among traders, leading to a fall in defence stocks such as MTAR Technologies Ltd, Bharat Heavy Electricals Ltd, and other mid-cap defence stocks, as markets had expected robust announcements on defence indigenisation and capex.

However, market sentiment improved later in the trading session as the detailed budget announcements showed that the defence space had been allocated a Rs 7.85 lakh crore budget for FY27, reiterating the government’s commitment to the defence budget over the long term. This led to a partial recovery in the defence space as traders’ attention turned from speech highlights to actual numbers. This incident has once again reinforced that while short-term market trends are influenced by expectations, allocation and execution visibility are the key influencers for defence stocks over the medium to long term.

Market expectation and recovery

The Nifty India Defence Index witnessed intense intraday volatility today, plummeting over 10% as the Union Budget speech failed to make any special mention of the defence sector, leading to profit-booking on the recent rally. However, market sentiment soon normalised as news trickled in that Rs 7.85 lakh crore has been allocated to the defence sector for FY27, resulting in selective buying and a partial recovery, thereby reiterating that the market reacted more to the allocation than the narrative.

The market had expected a strong, headline-driven push for the defence sector in Budget 2026 itself, especially after the sharp rally that had been witnessed in defence stocks over the past year. Investors had been looking for clear announcements regarding increased capital expenditure, reduced timelines for procurement, and new programmes based on indigenisation. However, the lack of any specific or headline mention in the Budget speech failed to meet these expectations, resulting in initial disappointment and profit-booking, as the Budget did not really exceed what the market had already priced in.

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