UPDATE: Indian equities are experiencing a significant sell-off following the government’s announcement of a higher derivatives tax in the recent budget, leading to the worst budget-day performance in six years. The market reaction, marked by broad-based declines, underscores investor apprehension regarding increased trading costs and a lack of immediate measures to attract foreign capital.
On February 1, 2026, the Nifty 50 index dropped approximately 1.96%, while the Sensex fell by 1.88% during a special Sunday trading session that coincided with the Union Budget announcement. Investors swiftly reacted to the proposed increase in the securities transaction tax (STT) on equity derivatives, with the tax on equity futures rising to 0.05% from 0.02% and the options premium tax increasing to 0.15% from 0.10%.
Market analysts are expressing deep concerns that this tax hike will create friction in a market segment vital for price discovery and liquidity. The immediate implications could discourage trading activity and exacerbate volatility, particularly on down days. Investors are now questioning whether domestic institutional buying can counterbalance ongoing foreign outflows.
Officials report that this budget lacked substantial initiatives aimed at stabilizing foreign portfolio flows, which are essential for sustaining index performance and sector leadership during times of global market stress. The absence of these measures has heightened fears that without foreign investment, market dynamics could shift unfavorably, further intensifying selling pressure.
As analysts and fund managers scrutinize the budget’s implications, the sentiment is clear: the derivatives tax hike may be manageable in the long run, but its near-term consequences could weigh heavily on market sentiment. The focus now turns to whether the government will implement confidence-building measures for offshore investors to alleviate the current risk-off environment.
The swift market reaction during this budget announcement highlights the urgency of the situation, as investors brace for potential impacts on trading activity and the earnings sensitivity of market-facing financial firms. The upcoming weeks will be critical in determining if domestic buying can provide the necessary support amidst a turbulent landscape of foreign selling.
Stay tuned for further updates as this story continues to develop.
