​STT hike in F&O may dent FII flows; trading volumes may thin: Analysts

STT kike will be a headwind for capital-market-linked stocks. With derivatives volumes already shrinking in recent months, the hike, analysts say, may further their pressure near-term earnings.

The Budget 2026-27 hiked the securities transaction tax (STT) for futures and options segments, which analysts suggest will be negative​ for foreign institutional investor (FII) flows in the near-term, particularly for high-frequency and derivative-focused global funds.

 

As per Budget 2026-27 proposals, the STT on futures has been raised from 0.02% to 0.05%, and on options premium from 0.10% to 0.15%. Recent data shows that FPIs have been cautious — with equity outflows of over ₹41,000 crore in January 2026 alone, reflecting global risk-off sentiment, elevated US bond yields, and currency pressures.

 

In this context, a higher STT, said Aakash Shah, Technical Research Analyst at Choice Equity Broking, further reduces post-tax returns, making India relatively less competitive for short-term and derivative-oriented foreign flows.

 

However, for long-only, fundamentally driven FPIs, the STT hike is unlikely to be a deal-breaker, he believes, as their investment decisions are more influenced by earnings visibility, currency stability, and policy predictability.

 

"That said, at the margin, higher transaction costs could tilt some global allocators towards other Asian markets, especially at a time when India is already facing pressure from AI-led capital shifts to the US, Taiwan and Korea. Overall, while the STT hike may help boost tax collections, it risks dampening trading volumes and could slow tactical FPI participation. To meaningfully revive sustained FPI inflows, investors will be looking more closely at macro stability, rupee movement, and consistency in tax policy rather than just growth optics," he said.

 

Shripal Shah, MD & CEO for Kotak Securities too, suggests that the steep increase in STT on futures and options, coming on top of last year’s hike, is likely to raise impact costs for traders, hedgers, and arbitrageurs.

 

"This could cool derivative activity and lead to a reduction in volumes. The intent appears to be volume moderation rather than revenue maximisation, as any potential revenue gain could be offset by lower derivative volumes," he said.

 

Raj Gaikar, a research analyst at SAMCO Securities also suggests that the move will pose a headwind for capital-market-linked stocks. With derivatives volumes already shrinking in recent months, the hike, he suggests, may further pressure near-term earnings visibility.

 

Following the announcement, BSE Ltd stock tanked nearly 15 per cent in intraday deals to Rs 2377.4 on the NSE after recovering some lost ground.

 

"The Finance Minister’s proposal to raise STT on futures to 0.05% is structurally negative for the capital market ecosystem, particularly F&O-driven businesses. Higher transaction costs are likely to reduce trading volumes, dampen short-term momentum, and lower profitability for active market participants. FII participation in derivatives may also moderate as post-tax trading efficiency declines, impacting overall liquidity. This can create a cascading effect on revenue streams of broking companies, exchanges, AMCs, and depositories, which are closely linked to market turnover," Gaikar said.