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The Indian stock market witnessed a sudden, sharp fall in intraday trade on Sunday, February 1, after the Finance Minister (FM) presented her ninth consecutive budget, announcing measures to accelerate economic growth while maintaining fiscal prudence.

The Sensex crashed 1,547 points, or 1.88%, to close at 80,722.94, while the Nifty 50 dropped 495 points, or 1.96%, to close at 24,825.45 after the FM announced the STT hike.

The BSE 150 MidCap Index crashed 1.91% and the BSE 250 SmallCap Index fell 1.61%.

Investors lost about ₹10 lakh crore in a single session as the overall market capitalisation of BSE-listed firms dropped to ₹450 lakh crore from ₹460 lakh crore in the previous session.

In the 30-share Sensex pack, only four stocks- TCS, Infosys, Sun Pharma, and Titan- ended in the green. SBI, Adani Ports, and BEL were the top losers in the Sensex index, each falling by over 5%.

Among the sectors, Nifty PSU Bank crashed 5.57%, while the Metal index plunged 4.05%. Nifty Oil and Gas, Financial Services, Auto, FMCG, and Realty crashed over 2%.

Nifty Bank lost 2% to end at 58,417.20.

Experts highlighted that the Budget kept growth in focus and avoided populism. For investors, the Budget is a long-term positive.

"The 2026 Budget prioritises competitiveness over populism, aiming to sustain India's growth at 6.5–7% while attracting global manufacturing and capital investment. It marks a strategic shift from consumption-driven to investment-led expansion, while positioning India for technological, material, and financial autonomy," said Pradeep Gupta, Chairman & MD, Anand Rathi Share and Stock Brokers Limited.

"From an investment perspective, this Budget presents structural opportunities for Indian equities, infrastructure, manufacturing, financials, and capital markets throughout the coming decade," Gupta said.

The biggest reason behind the sudden, sharp fall in the market is the Securities Transaction Tax (STT) hike proposal.

STT is a tax levied by the Indian government on the purchase and sale of stocks traded on recognised stock exchanges in India.

The Finance Minister proposed to increase the STT on Futures & Options (F&O) transactions.

Sitharaman proposed to raise the STT by more than 50% on futures to 0.05% from 0.02% and to 0.15% from 0.01% earlier on options transactions.

"I propose to raise the STT on Futures to 0.05% from the present 0.02%. STT on options premium and exercise of options are both proposed to be raised to 0.15% from the present rate of 0.1% and 0.125%, respectively," the FM said in her budget speech.

“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,” Shripal Shah, MD & CEO, Kotak Securities, noted.

Ajit Mishra, SVP of Research at Religare Broking, underscored that markets were anticipating some relief or no change in taxation, but the rise in STT has dented sentiment.

"The negative market reaction to the STT hike is largely sentiment-driven and linked to higher transaction costs, especially in the derivatives segment, which contributes significantly to daily volumes. An increase in STT directly compresses trading profitability for active participants and raises concerns around liquidity and volume growth," Mishra said.

"This is why we are seeing disproportionate pressure on brokerage and exchange stocks. In the short term, markets tend to react sharply to any friction in market efficiency, even though the long-term impact on fundamentals remains limited," said Mishra.

However, experts highlighted that the STT hike may not have a material long-term impact.

They point out that the government left the transaction tax on cash-based equity trades untouched, indicating its intent to make trading costs dearer in equity derivatives.

However, they added that the reaction was a knee-jerk one, as the cost of trading options would rise by a minuscule amount, while futures, which have negligible volumes on the BSE, would see a doubling of trading costs.

"This will have a medium impact on trading volumes, but it's an ill-timed move, given the current market sentiment," said Rajesh Baheti, MD of Crosseas Capital, one of the largest jobbing and arbitrage equity brokers.

"Had the FM reduced the STT on cash-based trades while increasing that on derivatives, it would have been good. This is also a dampener for arbitrage funds," added Baheti.

Currently, the STT on equity-based delivery trades is 0.1% for the purchaser, based on the volume-weighted average price. The volume-weighted average price measures the price at which the maximum volume has occurred.

For example, if 100 shares are purchased at ₹10 each and 50 shares at ₹12 each, the VWAP is ₹607.

The STT on an option is currently 0.1% on the premium received by a seller. This has been raised to 0.15% on the seller and the purchaser when the option is exercised -- i.e., when the underlying share is delivered.

The current sale of a futures contract attracts a 0.02% STT, which is raised to 0.05%.

Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.

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