Indian equities witnessed a sudden and sharp intraday sell-off on Sunday, February 1, shortly after Finance Minister Nirmala Sitharaman presented her ninth consecutive Union Budget.
While the Budget outlined measures aimed at accelerating economic growth and maintaining fiscal discipline, markets reacted negatively to key tax announcements.
The Sensex plunged over 2,800 points from the day’s high, while the Nifty 50 slipped to 24,571.75 after the Finance Minister announced a hike in the Securities Transaction Tax (STT).
Market experts noted that the Budget stayed focused on growth and consciously avoided populist measures, making it a long-term positive for investors.
“The 2026 Budget prioritises competitiveness over populism, aiming to sustain India’s growth at 6.5-7% while attracting global manufacturing and capital investment. It marks a strategic shift from consumption-driven to investment-led expansion, while positioning India for technological, material, and financial autonomy,” said Pradeep Gupta, Chairman & MD, Anand Rathi Share and Stock Brokers Limited.
“From an investment perspective, this Budget presents structural opportunities for Indian equities, infrastructure, manufacturing, financials, and capital markets throughout the coming decade,” Gupta said.
Why is the stock market falling?
The primary trigger behind the sharp market fall was the proposal to hike the Securities Transaction Tax (STT).
STT is a tax levied by the Indian government on the buying and selling of securities traded on recognised stock exchanges in India.
In her Budget speech, the Finance Minister proposed a sharp increase in STT on Futures and Options (F&O) transactions.
“I propose to raise the STT on Futures to 0.05% from the present 0.02%. STT on options premium and exercise of options are both proposed to be raised to 0.15% from the present rate of 0.1% and 0.125%, respectively,” the FM said in her budget speech.
Experts believe the steep hike has raised concerns over higher transaction costs, particularly in the derivatives segment.
“The steep increase in STT on futures and options, coming on top of last year’s hike, is likely to raise impact costs for traders, hedgers, and arbitrageurs. This could cool derivative activity and lead to a reduction in volumes.
The intent appears to be volume moderation rather than revenue maximisation, as any potential revenue gain could be offset by lower derivative volumes,” said Shripal Shah, MD & CEO, Kotak Securities.
Ajit Mishra, SVP of Research at Religare Broking, pointed out that markets were expecting either relief or no change in taxation, and the STT hike has weighed heavily on sentiment.
“The negative market reaction to the STT hike is largely sentiment-driven and linked to higher transaction costs, especially in the derivatives segment, which contributes significantly to daily volumes.
An increase in STT directly compresses trading profitability for active participants and raises concerns around liquidity and volume growth,” Mishra said.
“This is why we are seeing disproportionate pressure on brokerage and exchange stocks. In the short term, markets tend to react sharply to any friction in market efficiency, even though the long-term impact on fundamentals remains limited,” he added.
STT hike may not have material long-term impact
Despite the sharp reaction, experts believe the STT hike may not have a significant long-term impact on the markets.
They noted that the government left STT on cash-based equity trades unchanged, signalling its intent to make derivatives trading costlier rather than discouraging long-term equity investment.
Experts also described the market reaction as largely knee-jerk, pointing out that the increase in options trading costs would be marginal, while futures—where BSE volumes are negligible—would see a sharper rise in transaction costs.
“This will have a medium impact on trading volumes, but it’s an ill-timed move, given the current market sentiment,” said Rajesh Baheti, MD of Crosseas Capital.
“Had the FM reduced the STT on cash-based trades while increasing that on derivatives, it would have been good.
This is also a dampener for arbitrage funds,” Baheti added.
Currently, STT on equity delivery trades stands at 0.1% for the buyer, calculated on the volume-weighted average price (VWAP), which reflects the price at which the maximum volume of shares is traded.
For instance, if 100 shares are bought at ₹10 and 50 shares at ₹12, the VWAP is ₹10.67.
STT on options is currently levied at 0.1% on the premium received by the seller. This has now been raised to 0.15% on both the seller and the buyer when the option is exercised and the underlying shares are delivered. Meanwhile, STT on the sale of futures contracts has been increased from 0.02% to 0.05%.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint.
Investors are advised to consult certified experts before making investment decisions, as market conditions may change and individual circumstances may vary.
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