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India's benchmark stock indices slumped about 3% intraday, as finance minister Nirmala Sitharaman's decision to raise securities transaction tax (STT) on futures and options (F&O) trades spooked investors.

Higher-than-expected government borrowings for the next financial year starting 1 April also worried investors, as the move could spike interest costs for businesses and make sovereign debt more attractive than equities.

The BSE Sensex settled 1.9% lower at 80,722.94, while Nifty 50 fell 2% to 24,825.45, their lowest closing level since 30 September 2025. Losses intensified in the broader markets, with both Nifty Smallcap 250 and Nifty Midcap 100 declining over 2% each. BSE-listed companies saw their combined market capitalisation shrink by ₹94,05,81.75 crore on Sunday.

“To provide reasonable course correction in F&O segment in the capital market and generate additional revenues for the Government, it is proposed to raise the STT on Futures to 0.05% from present 0.02%. STT on options premium and exercise of options is proposed to be raised to 0.15% from the present rate of 0.1% and 0.125% respectively,” Sitharaman said in her budget speech on Sunday.

Stocks of brokerage Angel One tumbled 11% after the hike in STT, while those of Motilal Oswal Financial Services and Anand Rathi slumped 4% each.

Volatility spiked even before Sitharaman began her ninth consecutive budget speech, with India volatility index (VIX) jumping as much as 18%, before easing to end the session 6% higher. Equity markets remained open on Sunday to facilitate trading on account of the Union Budget 2026-27.

The Budget speech had no real big surprises, as it continues the past policies. The focus on manufacturing like textiles, electronic manufacturing services (EMS), semiconductor and bio-pharma was very good. Increase in public capital expenditure, defence, railways & roads, was positive, Vikas Khemani, founder and chief investment officer of Carnelian Asset Management & Advisors, said.

However, the hike in STT should have been avoided altogether, especially at a time when the government is simultaneously trying to ease regulations to attract foreign capital, calling it “an avoidable surprise.”

The budget announced an outlay of ₹40,000 crore for the EMS sector, buoying stocks of companies like Dixon Technologies, Syrma SGS Technology, and Kaynes Technology.

According to Feroze Azeez, joint chief executive officer (CEO) of Anand Rathi Wealth, “The increase in STT on F&O significantly raises transaction costs for derivatives traders, particularly impacting high-frequency traders, arbitragers and hedgers (thereby impacting their strategies)”.

This, according to him, could lead to lower derivative volumes and near-term volatility in the markets. While the move is positive from a government-revenue perspective, brokerage houses may see pressure on transaction-led earnings, and markets could face some immediate downside as participants adjust to higher costs, he explained.

“The hike in STT clearly does little to lift investor sentiment," Ashish Gupta, chief investment officer, Axis Mutual Fund, said.

Apart from the STT hike, the rest of the announcements were largely on expected lines, as the Budget was never meant to deliver any “big bang” measures, with fiscal discipline firmly in focus, Gupta said. The government’s projections for tax revenues and GDP growth appear conservative, yet credible.

“What may have unsettled markets,” Gupta said, “was the absence of any sector-specific stimulus”. On the positive side, he finds comfort in the government’s emphasis on capacity building, identifying long-term growth drivers and strengthening self-reliance in select areas.

The Indian government will gross borrow ₹17.2 trillion in 2026-27, Sitharaman proposed in her budget speech, above most market estimates. A Reuters report noted that market participants had pencilled in gross borrowings in the range of ₹16 trillion to ₹17.5 trillion, with the median estimate of a Reuters poll of 35 economists at ₹16.3 trillion.

Markets had expected easing of taxation on debt funds, which did not materialize and may have contributed to weak investor sentiment. However, Gupta pointed out that he did not anticipate such changes, adding that “a stable and predictable tax regime is far more important than frequent tinkering with tax rules.”

“There was limited reason for cheer for retail consumers and investors,” said Nirav Karkera, head of research at Fisdom, a fintech wealth management platform.

Most of the measures announced in the budget are directed towards longer term resilience, but have caused near-term disappointment. Among others, the increase in STT has created the largest dent in sentiment, especially considering the absence of any form of break on the capital gains tax front, he said.

“Equity capital market participation now comes with a higher price tag.”

A key positive impact of the hike in STT could be a cooling of speculative participation in the F&O market, but the jury is still out on whether the benefits of this move will outweigh the costs, he remarked.

Another gap, in Khemani’s view, was the absence of any incentive for bank deposits at a time when the financial system is clearly grappling with sluggish deposit growth.

Nifty PSU Bank and Nifty Midsmall Financial Services emerged as the biggest drags among NSE sectoral indices on Sunday, tumbling 5.6% and 3.7%, respectively.

In contrast, pharma and healthcare stocks found strong tailwinds after the finance minister’s announcement to position India as a bio-pharma development hub. Nifty Pharma and the BSE Healthcare index climbed about 2% each. However, these indices ended the session in the red.

Textile counters, meanwhile, rallied 3–7%, as the Centre unveiled plans to set up mega textile parks to give a fresh impetus to the sector. However, similar to pharma space, textile stocks also witnessed profit booking towards the end of the session, with many settling in the red.

Textile stocks had a mixed day on the Street. KPR Mill settled 1.3% higher on the NSE on Sunday, Vardhman Textiles gained 4%, and Arvind jumped 6.3%. Gokaldas Exports stole the show with a 10.7% surge.

On the flip side, Cantabil Retail slipped 2.5% and Bombay Dyeing fell 2.1%, while Raymond Lifestyle tumbled 5%.

Railway-linked stocks also rose after the finance minister proposed developing seven high-speed rail corridors. Shipping stocks surged after the finance minister announced a ship-repair ecosystem along with incentives for seaplanes in the annual budget.

However, most of the railway and shopping stocks ended in the red as selling intensified in the broader market.

The markets are unlikely to fall sharply on Monday, after Sunday's post-budget sell-off, Khemani said.

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