Markets reacted sharply to the proposed hike in the securities transaction tax (STT) on futures and options trading. Jyotivardhan Jaipuria, founder and managing director at Valentis Advisors, tells Puneet Wadhwa in an email interview that while the STT increase in the Budget may delay foreign portfolio investor (FPI) inflows, any turn in sentiment on the artificial intelligence (AI) trade globally could be a positive for flows to India. Edited excerpts:
What’s your interpretation of the Union Budget’s proposals?
We have long believed that the Budget is not a major market moving event with most reforms getting done outside it. We must remember that the major goods and services tax (GST) rate cuts a few months ago took the excitement out of this Budget. I would describe the Budget as a steady exercise, but not a game changer.
On the positive side, the government continued down the path of fiscal consolidation, and revenue assumptions of the Budget appear credible. It has made a thrust for increased foreign direct investment (FDI) through measures like safe harbour rules for GCCs and IT sectors and a tax holiday on data centres till 2047. The capital expenditure budgeted is in-line with nominal gross domestic product (GDP), and we hope that the private sector now takes the baton on capex. For the market, an increase in STT on futures and options is negative.
What message does the hike in STT send to the foreign investors? Will it impact market-marking or price discovery of the domestic market?
The futures and options market had seen a lot of speculative activity, and to that extent, the effort of the government to reduce volumes in that space is understandable. However, given that India underperformed emerging markets by 28 per cent in 2025, the worst performance in over 30 years, the timing of the sharp STT hike could have been better. Hopefully, the market stabilises over the next few weeks given that there is no STT change on the cash market.
What’s the road ahead for FPI flows into equities for the rest of 2026 in this backdrop?
We have been optimistic on reduced selling by FIIs led by: (a) Sharp under-performance: India under-performed emerging markets by 28 per cent last year (b) Positioning: India is a large under-weight market with the FPI underweight in India at 20-year low (c) Relative valuations: Are better now. India trades at a premium to emerging markets in-line with historic averages. While the STT increase in the budget may delay FPI inflows, any turn in sentiment on the AI trade (globally) could be a positive for flows to India.
How should investors approach capital market-linked sectors? What about the semiconductor and information technology space?
The capital market stocks are a great way to play the rising income levels in India and the financialisation of savings. However, earnings are likely to be weak over the next few quarters. We will probably get better opportunities to add positions in this sector. Within semiconductors, there are not too many direct plays. The IT sector still has longer-term challenges due to AI, though it may be a near-term place to hide given the cash in balance-sheets and changes in the buyback norms.
Will the proposal on Persons Resident Outside India (PROIs) be sufficient to offset the potential effects of higher transaction taxes on FPI flows?
This will only have a marginal impact on flows. Money tends to come only when markets are doing well. FPI flows in the cash market will not be impacted by the STT. However, we need to see strong growth in earnings or a global move away from the AI trade to attract international money into India.
What’s your view on the banking and the PSU sectors, especially in the light of Budget proposals?
While we will wait eagerly for the recommendations of (new high-level) committee (on banking) . we are positive on the banking sector given the likely increase in Net Interest Margins (NIMs) over the next year. Credit growth will also pick up, and we see credit costs being stable. There has been a proposal to merge some of the Public sector banks and that could be a focus for the market if there is any progress on the policy.
Would you allocate more to the tourism sector given the Budget’s focus on this segment?
We have been positive on airlines and hotels to play the tourism sector — both from Indians as well as foreign tourists. However, we have lightened our position, given that valuations are not cheap in the hotel sector.
How do you see India Inc responding to the proposal to shift the tax on buybacks to shareholders as capital gains, and introduce an additional tax for promoters?
The earlier changes in the buyback policy had virtually killed the buyback market. But given the new buyback norms, buyback may again make a comeback as an option to distribute money to shareholders. Promoters will be neutral between dividend and buyback, but the majority of the shareholders may find buyback a more tax efficient route.
What is your expectation for corporate earnings growth in FY 26-27?
We expect a revival in earnings in the financial year 2026-27 (FY27) with a 12-14 per cent growth. Banks will lead the revival as NIMs see a cyclical rise given that deposits will reprice downwards, while loans have already seen a rate reduction. The other sector where we are positive is cement, which has seen a consolidation and a few larger players own over half the industry capacity. Pharma is also likely to see sharp growth continuing. Any stability in the US tariffs could see chemicals perform well given that Chinese prices will rise after the export duty removal.
How are you likely to tweak your investment strategy in the backdrop of budget proposals?
There has been market consolidation over the past 18 months. The broader market has seen an even bigger sell-off with nearly 60 per cent of the stocks trading at least 40 per cent below their 52-week high. We are looking at earnings revival to drive stock market returns this year. We would look to deploy capital slowly as we see earnings growth getting more visible in shares which have corrected sharply, in line with our 3 “U”s philosophy — undervalued, under-owned, under-performing stocks.
 "Timing of the STT hike could have been better: Jyotivardhan Jaipuria")
