Budget 2026: Higher STT, No FPI Boost Drag Markets

Indian equity markets ended sharply lower on Budget 2026 day, as investors reacted negatively to key announcements made by Finance Minister Nirmala Sitharaman. Heavy selling pressure persisted throughout the session, with losses deepening after the Budget speech, reflecting waning investor confidence.

On February 1, the S&P BSE Sensex plunged 1,546.84 points, or 1.88 percent, to close at 80,722.94. The NSE Nifty50 declined 495.20 points, or 1.96 percent, to settle at 24,825.45. The sharp fall marked one of the weakest Budget-day showings for domestic equities in recent years.

Market participants attributed the sell-off to three key factors — a proposed hike in the securities transaction tax (STT) on derivatives, absence of meaningful measures to attract foreign portfolio investors (FPIs), and sustained foreign outflows from Indian equities.

STT Hike Weighs On Market Sentiment

The proposed increase in STT on futures and options trading emerged as the biggest negative surprise for the market, particularly for active traders and capital-market-linked stocks.

Ajay Menon, MD & CEO, Wealth Management at Motilal Oswal Financial Services, said the move directly impacts trading profitability and raises concerns around liquidity.

“Indian equities ended sharply lower as the Finance Minister proposed an increase in the STT on F&O transactions in the Union Budget 2026. Higher STT directly impacts the trading profitability for active participants and raises concerns around liquidity and volume growth. This triggered strong selling pressure in capital market stocks including brokerages and exchanges,” Menon said.

Siddharth Alok, Director and Head of Advisory at Epsilon Money Investment Management, noted that the Budget offered little relief to market participants.

“Steep increase in STT and no changes in long-term capital gains tax will surely disappoint market participants in the short term,” he said.

Ashwani Dhanawat, Executive Director and Chief Investment Officer at Shriram General Insurance, added that higher transaction costs could hurt volumes and near-term sentiment.

“The hike raises transaction costs, potentially curbing speculative volumes, impacting liquidity in F&O, and contributing to immediate market pressure. While aimed at moderating excessive derivatives activity and boosting revenue, it could dampen retail participation during a bull phase and impact breaking revenues in the short term,” he said.

Lack Of FPI Incentives Adds To Pressure

Another major concern was the absence of fresh incentives for foreign portfolio investors. FPIs have already pulled out nearly $23 billion from Indian equities since the beginning of 2025, weighing heavily on market sentiment.

Foreign investor outflows hit a five-month high in January, making domestic markets increasingly vulnerable to negative triggers. The lack of policy measures to arrest or reverse these outflows during the Budget further unsettled investors.

With liquidity already under pressure, the combination of higher transaction costs and continued foreign selling amplified the market’s reaction, turning Budget day into a bloodbath for Dalal Street.

Sectoral Impact

Shares of Indian shipping and maritime companies rallied on Budget day after Finance Minister Nirmala Sitharaman announced measures to develop a domestic ship-repair ecosystem and extend incentives for seaplane operations in the Union Budget.

The policy push boosted investor sentiment across the sector, with Shipping Corporation of India gaining up to 4.3 percent. Essar Shipping jumped as much as 9.2 percent, while Dredging Corporation of India surged 9.3 percent in intraday trade, emerging among the top gainers.

Shares of defence companies came under heavy selling pressure on February 1 after the Union Budget’s capital expenditure plans for the sector fell short of market and industry expectations.

The Nifty Defence index slumped nearly 9 percent to 7,458.65, tracking a sharp sell-off in the broader market during afternoon trade on Sunday.

While presenting Budget 2026, Finance Minister Nirmala Sitharaman pegged defence expenditure for FY27 at Rs 5.94 lakh crore, compared with ₹5.68 lakh crore in FY26. Although defence capital outlay rose 21 percent year-on-year, with allocations for modernisation increasing a sharper 24 percent, investors appeared underwhelmed by the pace of spending growth.

As a result, defence stocks bore the brunt of the sell-off. Bharat Dynamics (BDL) tumbled nearly 10 percent to Rs 1,384.4 per share. Garden Reach Shipbuilders & Engineers (GRSE) and Data Patterns (India) plunged close to 14 percent each, while Paras Defence dropped 12 percent.

Heavyweights in the sector also witnessed steep declines. Mazagon Dock Shipbuilders, Hindustan Aeronautics (HAL), Cochin Shipyard and Bharat Electronics (BEL) fell around 10 percent each, while BEML slipped nearly 11 percent, reflecting broad-based disappointment across defence counters.

Shares of mineral and mining companies rallied on February 1 after Finance Minister Nirmala Sitharaman highlighted rare earth magnets while presenting the Union Budget 2026, lifting sentiment across the sector.

Gujarat Mineral Development Corporation (GMDC) climbed around 7 percent to Rs 617.8 per share, while Orissa Minerals Development Company also advanced nearly 7 percent to trade at Rs 4,776 apiece. NMDC, which was trading in the red earlier in the session, pared losses and turned positive, gaining nearly 2 percent.