The government’s move to curb speculative trading by raising the securities transaction tax (STT) on derivatives spooked investors on Sunday with benchmark indices Sensex and Nifty falling sharply by nearly 2 per cent.
No relief on capital gains, removal of interest deduction against dividend and mutual fund income and higher gross market borrowing projected for FY27 further weighed in on the investor sentiment.
Reversing the early gains, the 30-share BSE Sensex plunged sharply by 1546.84 points or 1.88 per cent while the 50-share NSE Nifty tanked 495.20 points or 1.96 per cent to settle at 24,825.45.
The budget proposed to raise the STT on futures to 0.05 per cent from present 0.02 per cent. STT on options premium and exercise of options is proposed to be raised to 0.15 per cent from the present rate of 0.1 per cent and 0.125 per cent respectively.
“We must be realistic about the impact of STT on capital markets. The STT hike and the removal of dividend set-offs seem to be bringing a headwind to markets.
“They make many high-frequency and arbitrage trades unviable, which will squeeze market liquidity and leverage in the short term. But with a prudent 4.3 per cent fiscal deficit and a ₹12.2 lakh crore capex push, the long-term earnings story remains the real hero for India,” said Raamdeo Agrawal, chairman and co-founder, Motilal Oswal Financial Services.
“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,” said Shripal Shah, MD and CEO, Kotak Securities. Sebi analysis shows 9 out of 10 investors lose money derivatives trade.
“Market unease is centred on the increase in STT on F&O, particularly the sharper hike on futures. This comes on the back of higher capital gains taxes last year, raising overall transaction costs for market participants,” Pranav Haridasan, MD and CEO, Axis Securities, said.
Almost all the major sectoral indices traded in to the red but capital market, defence, and PSU bank indices lost the most, shedding over 5 per cent.
“In the wake of higher STT on Futures & Options and no relief on capital gains, corporate earnings growth in coming quarter and FY27 will become even more critical for equity market outlook over the next 12-18 months,” said Rahul Singh, CIO - equities, Tata Asset Management.
“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,” said Raj Gaikar, research analyst, SAMCO Securities.
Asian and European markets are closed on Sunday due to holidays. US markets ended lower on Friday. Market observers are keeping a close watch on how the foreign portfolio investors react on Monday’s trade.
Analysts, however, remain bullish on long term participation from foreign investors despite the short term impact from STT rise.
“Measures to deepen NRI participation, broaden fixed-income markets through stronger corporate and municipal bond frameworks, simplify foreign investment rules, and enhance IFSC competitiveness are constructive for long-term capital allocation,” said Gaurav Kulshrestha, CIO, Nexedge Capital.