STT hike on Futures dampen stock market sentiment; Sensex, Nifty crash nearly 2%

Mumbai: Benchmark stock indices Sensex and Nifty dived sharply by nearly 2 per cent on Sunday after Finance Minister Nirmala Sitharaman proposed a hike in the Securities Transaction Tax (STT) on derivatives.

Reversing the early gains, the 30-share BSE Sensex plunged sharply by 2,370.36 points or 2.88 per cent to slide below the 80,000-mark at 79,899.42 in afternoon trade as the finance minister announced a hike in STT on futures contracts to 0.05 per cent from the current 0.02 per cent.

The barometer settled at 80,722.94, down 1,546.84 points or 1.88 per cent.

The 50-share NSE Nifty tanked 495.20 points or 1.96 per cent to settle at 24,825.45. During the day, it tumbled 748.9 points or 2.95 per cent to 24,571.75.

Stock markets were opened for regular trading on Sunday due to the budget presentation by Sitharaman for the next financial year.

"Market unease, however, is centred on the increase in STT on F&O, particularly the sharper hike on futures. This comes on the back of higher capital gains taxes last year, raising overall transaction costs for market participants," Pranav Haridasan, MD and CEO, Axis Securities, said.

Futures are a margined, risk-managed product and not typically the primary source of retail excess, which raises questions on whether higher STT will deliver the desired outcome or instead weigh on liquidity, participation and India’s market cost competitiveness, he noted.

"These concerns are being voiced by foreign investors and domestic traders, and are reflected in the immediate market reaction," Haridasan added.

From the 30 Sensex firms, State Bank of India tanked 5.61 per cent, while Adani Ports lost 5.53 per cent.

Bharat Electronics, ITC, Tata Steel, UltraTech Cement and Reliance Industries were also among the laggards.

Tata Consultancy Services, Infosys, Sun Pharma and Titan were the gainers.

"The increase in Securities Transaction Tax (STT), especially in futures and options, is likely to act as a marginal negative for foreign portfolio investor (FPI) flows in the near term, particularly for high-frequency and derivative-focused global funds," Aakash Shah, Technical Research Analyst at Choice Equity Broking, said.

Foreign institutional investors bought equities worth Rs 2,251.37 crore on Friday, according to exchange data.

"The proposed increased STT in F&O is a dampener for capital market entities in the short term, but may augur well in the long term," HDFC Securities' managing director and chief executive Dhiraj Relli said.

Vinod Nair, Head of Research, Geojt Investments Limited, said, The budget supports sectors affected by global trade tariffs and focuses on emerging areas of development, including data centers, GCC, semiconductors, biopharma, rare earth elements, and manufacturing.

Additionally, it extends support to traditional sectors like textiles, aquaculture, and MSMEs, which have been impacted by global protectionist trade policies, he said.

"Despite these measures, the market's reaction has been negative, primarily due to low expectations, limited outlays and the negative bias created by the increased Securities Transaction Tax (STT) for futures, triggering a knee-jerk response," Nair noted.

Asian and European markets are closed on Sunday due to holidays. US markets ended lower on Friday.

"The Finance Minister’s proposal to raise STT on futures to 0.05% is structurally negative for the capital market ecosystem, particularly F&O-driven businesses. Higher transaction costs are likely to reduce trading volumes, dampen short-term momentum, and lower profitability for active market participants. FII participation in derivatives may also moderate as post-tax trading efficiency declines, impacting overall liquidity.

"This can create a cascading effect on revenue streams of broking companies, exchanges, AMCs, and depositories, which are closely linked to market turnover. With derivatives volumes already shrinking in recent months, the hike may further pressure near-term earnings visibility. While fiscally supportive, the measure poses headwinds for capital-market-linked stocks," Raj Gaikar, Research Analyst, SAMCO Securities, said.

On Friday, the Sensex declined 296.59 points, or 0.36 per cent, to settle at 82,269.78. The Nifty dropped 98.25 points, or 0.39 per cent, to end at 25,320.65.