The stock markets were caught off guard on Sunday after the Union Budget sharply raised the securities transaction tax (STT) on futures and options. The worst Budget-day performance since 2020 wiped out Rs 9.4 lakh crore in market value.
STT Shock
Finance Minister Nirmala Sitharaman announced a steep hike in STT on derivatives, proposing to raise the levy on futures to 0.05% from 0.02%. The STT on options premium and on the exercise of options was increased to 0.15% from 0.1% and 0.125%, respectively — translating into hikes of up to 150% in some segments.
The announcement sparked an immediate selloff. The Sensex at one point plunged over 2,000 points before closing 1.88% lower, down 1,546 points at 80,722. The Nifty shed 495 points to end at 24,825.
Market participants were split on the move. Some warned that the higher tax could accelerate foreign capital outflows, particularly from high-frequency and arbitrage traders, while others argued that the hike was necessary to curb excessive retail speculation in the derivatives market.
Shankar Sharma, founder of GQuant, backed the decision. “The government has done absolutely the right thing in increasing the STT on derivatives. This is a poison that has spread far and wide, even to the smallest strata of Indian society,” he said. With trading activity impossible to stop altogether, Sharma said raising costs was the most effective way to rein it in. “The market may not like it, but this is the best outcome we could rationally expect.”
Raamdeo Agrawal, chairman and co-founder of Motilal Oswal Financial Services, said the STT hike, combined with the removal of dividend set-offs, had created a near-term headwind for markets. These changes, he said, would render many high-frequency and arbitrage strategies unviable, squeezing liquidity and leverage in the short run. However, Agrawal said investors should focus on the broader positives, including a prudent fiscal deficit target of 4.3%, a ₹12.2-lakh-crore capital expenditure push and the long-term earnings growth story.
Shripal Shah, MD and CEO of Kotak Securities, said the sharp increase in STT — coming on top of last year’s hike — would raise impact costs for traders, hedgers and arbitrageurs, cooling derivative activity and reducing volumes. “The intent appears to be volume moderation rather than revenue maximisation, as any potential tax gains could be offset by lower derivative turnover,” he said.
Trading volume fears mount
The government currently collects around ₹62,000 crore annually from STT, and the increase is likely increase the collections by another ₹10,000 crore that will not materially boost revenues. Instead, it is expected to dampen speculation in a segment where reports suggest more than 90% of retail participants lose money, while a large share of profits accrue to high-frequency traders.
Exchange data show derivatives activity had surged in recent months. In January, average daily F&O turnover (premium) on the NSE hit a 15-month high of ₹2.47 lakh crore, while BSE recorded its highest-ever turnover of ₹29,093 crore. On Sunday, equity derivatives turnover on the NSE touched ₹2.96 lakh crore.
Stocks of exchanges, brokers and market infrastructure firms bore the brunt of the selloff, having already been under pressure from earlier regulatory curbs by the Securities and Exchange Board of India. Shares of BSE and Angel One plunged over 10% to close at ₹2,570 and ₹2,321.90, respectively. Nuvama Wealth fell 6.3%, while Motilal Oswal declined 3.4%. Depositories also slid, with CDSL down 7% and NSDL falling 1.7%.
Feroze Azeez, joint CEO of Anand Rathi Wealth, said the STT hike significantly increases transaction costs for derivatives traders, particularly high-frequency players, and is likely to lead to lower volumes and heightened near-term volatility.