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The Union Budget’s proposal to sharply raise the securities transaction tax (STT) on futures and options (F&O) is likely to act as a near-term dampener for equity markets, particularly for brokerage and exchange stocks, analysts said on Sunday. The move, aimed at curbing excessive speculation in derivatives trading, triggered a sharp selloff in capital market stocks immediately after Finance Minister Nirmala Sitharaman’s budget speech.

HDFC Securities Managing Director and CEO Dhiraj Relli said the higher STT would weigh on sentiment in the short run, even though it could have long-term benefits. “The proposed increased STT in F&O is a dampener for capital market entities in the short term, but may augur well in the long term,” he said.

Reflecting this, the markets rebounded on Monday. The Sensex index rallied 1,345 points from its intraday low of 80,387.25, to hit a high of 81,732, before ending the day at 81,666, rising 944 points or 1.17 per cent. Similarly, the Nifty50 swung between 24,679 and 25,108, before shutting the shop at 25,088, advancing 263 points or 1.06 per cent.

Sitharaman announced a sharp hike in STT rates, stating that the move would provide a “reasonable course correction” in the derivatives segment and also help generate additional revenue. Under the proposal, STT on futures has been raised to 0.05 per cent from 0.02 per cent, while STT on options premium and exercise of options has been increased to 0.15 per cent from 0.1 per cent and 0.125 per cent, respectively. The revised rates will come into effect from April 1, 2026.

Explaining the rationale, Sitharaman said repeated concerns had been raised by parents over losses incurred by retail investors. She stressed that the hike has been limited only to the F&O segment, citing Sebi data showing that nearly 90 per cent of retail traders in derivatives incur losses.

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The STT hike was among the key reasons cited for the sharp correction in equities immediately after the budget announcement, with brokerage firms and stock exchange stocks coming under pressure. Regulators, including Sebi, have in recent years taken multiple steps to rein in derivatives volumes amid concerns over rising retail participation and losses.

Kotak Institutional Equities termed the move a surprise, noting that this was the third STT hike in the past four years. While it expects limited impact on options volumes — which are more influenced by factors such as contract size and weekly expiries — Kotak said the increase in futures STT appears “somewhat unreasonable” given higher institutional participation. The brokerage added that lower STT on cash equities would have been more effective in addressing the disproportionate share of F&O volumes relative to the cash market.

Citi said the higher STT could lead to a marginal reduction in F&O volumes in the near term and dampen customer sentiment, but is unlikely to materially alter long-term trading behaviour. It pointed out that despite earlier STT hikes, options premium turnover had grown over 30 per cent year-on-year in FY24 and the first half of FY25, though growth slowed to around 10 per cent after regulatory changes and recent tax increases. Citi flagged Angel One and Groww as more vulnerable due to their high F&O revenue mix, while expecting minimal impact on other capital market players.

Jefferies also termed the STT hike a sentimental negative, but said the actual impact on options turnover could be limited. Industry discussions suggest a potential up to 5 per cent volume impact, with a similar decline in average daily turnover possibly translating into a 4 per cent earnings impact for certain platforms such as BSE and Groww.

Bernstein said the STT hike would hurt the derivatives trading value chain, particularly high-frequency trading and market-making firms, and could reduce the overall profit pool in Indian markets if spreads are meaningfully squeezed.