Budget 2026: Mid, smallcap indices fall 4% in 2 days as STT hike takes toll

Small and mid-cap stocks (SMIDs) extended their slide on Monday as Budget 2026's proposal to double STT on F&O trades triggered liquidity concerns.

Mid, smallcap stocks fall after Budget 2026

 

Small, and mid-cap stocks (SMIDs) continued to face selling pressure from investors on Monday as cautious investor sentiment, following the presentation of Budget 2026, extended on Dalal Street today.

 

The Nifty SmallCap index slipped 1.7 per cent on the National Stock Exchange (NSE) in the intraday today, while the Nifty MidCap index fell 1.3 per cent.

 

On Sunday, February 1, the Midcap 100 slipped 2 per cent, and the Smallcap 100 dropped 2.7 per cent after Union Finance Minister Nirmala Sitharaman increased securities transaction tax (STT) on futures and options (F&O) trades.

 

Budget 2026 proposed to raise STT on Futures from 0.02 per cent to 0.05 per cent, and on Option Premium from 0.1 per cent to 0.15 per cent.

 

The unexpected increase in STT has soured market mood as a gigher STT on derivatives could lead to lower derivatives and cash market volumes, which could effectively reduce market liquidity.

 

Further, in the absence of domestic liquidity, global investors would demand higher liquidity premium, which would lead to higher cost of capital for India, pushing foreign investors to cheaper markets elsewhere.

 

According to analysts, India competes for global capital against the US, ASEAN economies, and other emerging markets. At a time when India needs to deepen market liquidity and attract global flows, raising frictional trading costs sends the opposite signal.

 

"Derivative markets are not just speculative arenas. They are liquidity engines and risk-transfer mechanisms that support price discovery in the cash market. Weakening that ecosystem can have second-order consequences on valuation multiples, fundraising conditions, and long-term capital formation," pointed out Jimeet Modi, founder and chief executive officer (CEO), SAMCO Group, adding that the move underdelivers on strengthening India’s positioning as a globally competitive capital market.

 

Top midcap, smallcap losers today

At noon, 72 stocks from the Nifty MidCap100 index were trading lower, led by Bharat Dynamics (down 5.8 per cent), Hudco (5.7 per cent), Tata Communications (4.8 per cent), and Godfrey Phillips (4.7 per cent).

 

Besides, Oil India, Glenmark Pharma, M&M Finance, RVNL, SAIL, Vodafone Idea, Patanjali Foods, Kalyan Jewellers, Federal Bank, IDFC First Bank, Aditya Birla Capital, Prestige Estates, and Indian Bank were down in the range of 2.5 per cent to 4.7 per cent.

 

Meanwhile, in the Nifty SmallCap index, 76 stocks trading lower at the same time. These included Five Star Business Finance, Aegis Vopak, KEC International, Wockhardt Pharma, BLS International, IEX,  Newgen Technologies, Jyoti CNC, and Kaynes Technologies. 

 

As of 2025, over 200 stocks traded in the F&O segment, as per NSE data. Out of these 220 F&O stocks, roughly 85–100 stocks belonged to the broader market (midcap and high-liquidity smallcap stocks).

 

India, according to a Reuters report, remains the world’s largest derivatives market by volume, with nearly 60 per cent of global equity derivatives traded in April 2025 — indicating massive overall turnover.

 

Monthly premium turnover in the derivatives market, which peaked at nearly ₹25,000 crore in mid-2024, fell to about ₹15,000–17,000 crore in early 2025 as market regulator Securities and Exchange Board of India (Sebi) tightened noose around F&O traders. 

 

Retail and institutional participation surged through FY25, with around 10.7 million unique traders active in the F&O segment in India till early 2025.

 

Impact of STT on F&O trades

According to analysts, STT doubling in Budget 2026 will not only hit broking companies by raising transaction costs in the high-volume futures segment, but also a lot of FIIs, who use F&O as a hedging mechanism.

 

“This is a major setback to the growing capital market sector. This will not only curb retail participation in the F&O segment but will also have an effect on lower volumes. This will impact all profitability mechanisms for capital market players and overall a net negative. Doubling STT in futures and options while still keeping STCG and LTCG (short-term/long-term capital gains tax) at elevated levels is extremely poor,” said Shashank Udupa, a Sebi-registered research analyst and fund manager at Smallcase.

 

Some analysts, however, see it as a positive for long-term market stability.

 

“While the enhanced STT regime may create near-term headwinds for capital market participants, it reflects a long-term vision for market stability and maturity. This trade-off should ultimately benefit the broader financial ecosystem,” noted Dhiraj Relli, MD & CEO, HDFC Securities.