F&O STT hike unlikely to deter active traders; markets will come around

From a macroeconomic perspective, the budget looks quite good. The government appears to be on a clear glide path toward better financial and fiscal deficit management. However, the market has expressed concerns over the increase in securities transaction tax (STT) on futures and options.

 

That said, this concern is likely to fade over time. Traders who are actively involved in derivatives will continue to trade regardless, as a marginal increase in transaction costs is unlikely to deter them in the long run. Initially, though, there has been some disappointment, especially because there was an expectation that the STT might be reduced or withdrawn. 

 

Historically, STT was introduced when long-term capital gains tax was reduced to zero. Now, with long-term capital gains tax at 10 per cent and STT being increased further, the market reaction has understandably been negative.

 

In the short-term, there may be some impact on trading volumes, particularly speculative activity. However, over time, market participants tend to adapt, and regular traders are likely to return to their usual activity levels.

 

On the sectoral front, there were no major surprises in the budget. The increase in infrastructure allocation, at roughly ₹1 trillion, appears modest given the scale of India’s infrastructure needs. Last year’s allocation was around ₹11 trillion, and this year it stands at approximately ₹12–12.2 trillion, which is not a substantial jump. This is one area where the government could arguably have done more.

 

That said, sector-wise measures have been fairly comprehensive. The focus on biopharma, information technology (IT), innovation, and targeted subsidies has been positive. Overall, most priority sectors appear to have been adequately addressed, with no major omissions.

 

The key message from the Budget is clear: fiscal consolidation will continue alongside growth, supported by responsible financial management. The sharp reduction in the fiscal deficit suggests an effort to strengthen macro stability and possibly work toward a sovereign rating upgrade over time.

 

Regarding foreign institutional investors (FIIs), while some may not participate immediately due to the Budget being presented on a Sunday, their broader investment decisions are unlikely to hinge on minor changes in STT. Most FIIs are long-term investors in cash equities, for whom India’s overall market attractiveness matters far more than marginal transaction cost changes. However, FIIs that focus primarily on derivatives trading may be impacted in the short term.

 

As a result, futures and options volumes could see a temporary dip as higher transaction costs raise the hurdle rate for traders. That said, past experience suggests that such declines are short-lived. After an initial adjustment period of a few months, volumes typically recover as market participants adapt to the new cost structure. While the STT hike is a short-term negative, trading activity is expected to normalise after the initial reaction.

 

Disclaimer: U R Bhat, co-founder & director, Alphaniti Fintech. Views expressed are his own.

 

(As told to Puneet Wadhwa)