The Indian stock market witnessed a sharp intraday sell-off on Sunday, February 1, shortly after Finance Minister Nirmala Sitharaman presented her ninth consecutive Union Budget.
The Sensex plunged more than 2,800 points from the day’s high, while the Nifty 50 slipped to 24,571.75, reacting negatively to the proposed hike in the Securities Transaction Tax (STT) on derivatives.
Market experts noted that while the Budget focused on boosting growth and maintaining fiscal discipline, the immediate reaction was driven by concerns over higher transaction costs in the futures and options (F&O) segment.
“The Union Budget 2026 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-led to investment-driven growth,” said Pradeep Gupta, Chairman & MD of Anand Rathi Share and Stock Brokers.
“From an investment standpoint, the Budget offers long-term structural opportunities across equities, infrastructure, manufacturing, financials, and capital markets,” he added.
Why did the stock market fall?
The primary trigger for the sharp market decline was the announcement of a significant hike in STT on F&O transactions.
STT is a tax levied on the purchase and sale of securities traded on recognised stock exchanges. In her Budget speech, the Finance Minister proposed raising STT on futures to 0.05% from 0.02%, and on options to 0.15% from earlier levels of 0.1% on premiums and 0.125% on exercise.
“The steep increase in STT on futures and options, following last year’s hike, will raise trading costs for traders, hedgers, and arbitrageurs. This could lead to moderation in derivative volumes, with the intent seemingly focused on curbing excessive trading rather than revenue generation,” said Shripal Shah, MD & CEO of Kotak Securities.
Ajit Mishra, SVP of Research at Religare Broking, said markets were expecting tax relief or status quo, and the hike dented investor sentiment.
“The negative reaction is largely sentiment-driven, as higher STT directly impacts profitability in the derivatives segment, which accounts for a major share of daily market volumes. This has led to disproportionate pressure on brokerage and exchange stocks,” Mishra noted, adding that long-term fundamentals remain largely unaffected.
STT hike unlikely to hurt markets in the long run
Despite the sharp sell-off, experts believe the STT hike will not have a significant long-term impact on the market.
They pointed out that the government left STT on cash equity delivery trades unchanged, signalling its intention to make derivative trading more expensive rather than discouraging long-term equity investing.
“The market reaction is largely knee-jerk. The increase in option trading costs is marginal, while futures — which have relatively low volumes — will see higher charges,” said Rajesh Baheti, MD of Crosseas Capital.
“While this could have a medium-term impact on volumes, the timing is not ideal given current market sentiment. A reduction in STT on cash trades alongside a derivative hike would have been more balanced,” he added.
At present, STT on equity delivery trades remains at 0.1% for buyers. STT on options has been raised to 0.15% on premiums and on exercised contracts, while STT on futures sales has increased from 0.02% to 0.05%.