The Indian stock market saw a sharp sell-off on Budget day after Finance Minister Nirmala Sitharaman announced a steep hike in Securities Transaction Tax (STT) on derivatives. The initial shock pushed benchmark indices down nearly 3 percent intraday, before some recovery towards the close.
Despite the sharp reaction, analysts believe the fall was largely technical and may prove short lived, as India’s macro fundamentals remain intact.
In her Budget speech, the finance minister proposed higher STT on futures and options trades:
STT on futures raised to 0.05 percent from 0.02 percent
STT on options premium increased to 0.15 percent from 0.01 percent earlier
This significantly raised transaction costs for traders. For instance:
Selling ₹1 lakh worth of futures now attracts ₹20 as STT, compared with ₹12.50 earlier
On a ₹10,000 options sale, STT has risen to ₹10 from ₹6.25
The announcement led to immediate unwinding of derivatives positions.
Sensex: Fell 1,547 points, or 1.88 percent, to close at 80,722.94
Nifty 50: Dropped 495 points, or 1.96 percent, to settle at 24,825.45
Investor wealth eroded by nearly ₹10 lakh crore in a single session, with total market capitalisation of BSE-listed companies slipping to about ₹450 lakh crore.
Market experts say the sharp fall was driven more by a repricing of trading strategies than by concerns over economic growth.
Jimeet Modi of SAMCO Group said the STT hike could affect market liquidity by reducing derivatives volumes. Over time, thinner liquidity may influence valuations and capital flows. However, he described the Budget as fiscally stable, even if conservative.
According to analysts, the STT hike is unlikely to deter long-term, fundamentals-driven investors.
Aakash Shah of Choice Equity Broking said foreign portfolio investors typically focus on earnings visibility, currency stability and policy consistency rather than transaction costs alone.
“The hike may reduce tactical and short-term participation, but it is unlikely to alter long-term investment decisions,” he said.
The broader Budget framework remains supportive for equities:
Fiscal deficit target set at 4.3 percent for FY27
Record capital expenditure allocation of ₹12.2 lakh-crore
Continued focus on infrastructure, manufacturing and asset monetisation
Prasenjit Paul of 129 Wealth Fund said the sell-off was a knee-jerk reaction to higher F&O taxes and buyback-related changes, not a reflection of weak fundamentals.
Market veterans believe volatility will ease once traders adjust to the new cost structure. Dhiraj Relli of HDFC Securities said investors should stay invested and focus on sectors with strong earnings visibility.
Historically, policy-led shocks have often been followed by recoveries as attention shifts back to earnings growth and macro stability.
With fiscal credibility intact and government capex momentum continuing, the broader equity story remains unchanged. The latest correction appears to be driven by higher transaction costs in derivatives, rather than any deterioration in India’s long-term growth outlook.