A sharp hike in the securities transaction tax (STT) on derivatives and the absence of market-supportive measures in the Union Budget rattled investor sentiment on Sunday, pushing domestic equities to their steepest Budget-day decline in six years.
What triggered the sharp selloff on Budget day?
The Sensex slid as much as 2,370 points, or 2.8 per cent, intraday before closing at 80,723, down 1,547 points, or 1.8 per cent. The Nifty fell nearly 3 per cent during the session and ended at 24,826, a decline of 495 points, or 2 per cent. This marked the biggest Budget-day fall for both indices since February 1, 2020. The total market capitalisation of BSE-listed companies eroded by Rs 9.4 trillion to Rs 451 trillion.
The Union government proposed raising the STT on futures to 0.05 per cent from 0.02 per cent. The tax on options premium was increased to 0.15 per cent from 0.1 per cent, while STT on the exercise of options was raised to 0.15 per cent from 0.125 per cent.
Why did the STT hike unsettle investors?
The derivatives tax hike, coupled with the absence of any relief on long-term capital gains or incentives to lure back foreign portfolio investors (FPIs), caught markets off guard.
“There were expectations that STT would be done away with or, at the very least, that there would be some easing on long-term capital gains. These expectations were built over time, and today’s announcements came as a shock,” said U R Bhat, co-founder of Alphaniti Fintech.
In contrast, Saurabh Mukherjea, chief investment officer and co-founder of Marcellus Investment Managers, termed the move a necessary corrective.
“Over the past few years, speculative derivatives trading has destroyed large amounts of household capital. This step should help redirect savings towards consumption and productive investment,” he said.
How are FPIs and global peers shaping market sentiment?
The tax hike comes at a time when Indian equities have been underperforming most emerging market peers. Year-to-date, the Sensex has declined 5.3 per cent and the Nifty 5 per cent. Except for Indonesia’s Jakarta Composite, major global benchmark indices have posted gains this year.
FPIs have remained heavy sellers of Indian equities. In 2025, they sold shares worth Rs 1.7 trillion, and in 2026 so far, net outflows stand at Rs 35,962 crore. On Sunday, FPIs were net sellers to the tune of Rs 588 crore, while domestic institutions too pulled out Rs 683 crore.
Which sectors bore the brunt of the selloff?
Stocks linked to market activity bore the brunt of the selloff. Shares of BSE fell 8.1 per cent. Billionbrains Garage Ventures, the parent of Groww, declined 5.1 per cent, while Angel One dropped 8.6 per cent.
Banking stocks also came under pressure, particularly public sector lenders, amid concerns that higher-than-expected gross borrowings could push up bond yields and dent treasury income. State Bank of India declined 5.3 per cent, while HDFC Bank fell 1.2 per cent and ICICI Bank 1.5 per cent. The Nifty PSU Bank index dropped 5.6 per cent, and the Nifty Bank index fell 2 per cent.
“Funding higher capital expenditure through increased borrowing risks tightening financial conditions by pushing up bond yields and the economy’s cost of capital,” Mukherjea said.
Were there any pockets of resilience?
IT stocks gained after the government proposed taxing share buybacks as capital gains. Pharma stocks advanced after the announcement of a Rs 10,000-crore outlay to build a domestic ecosystem for biologics and biosimilars.
Market breadth remained negative, with 2,444 stocks declining and 1,699 advancing.
 "Union Budget 2026-27: STT shocker sends stock market into a tailspin")
