On Sunday, February 1, intraday sell-offs in Indian equity markets were rather sharp, and soon after the presentation of the Union Budget by Finance Minister Nirmala Sitharaman, volatility erupted despite the focus of the government on growth and fiscal discipline. The Sensex benchmark nosedived more than 2,300 points compared with the day high while the Nifty 50 dropped to 24,571.75 as anxious investors responded to some of the tax-related announcements.
According to the market participants and specialists, the Budget did not take many populist decisions and remained focused on long term economic growth, infrastructure expenditure and fiscal tightening. Structurally, most analysts shared the view that the Budget was encouraging to the medium- to long-term prospects of India. The reaction of the immediate market however was riddled with the worry of increased transaction costs to the traders.
The main catalyst to the abrupt decline was the suggested increase in Securities Transaction Tax (STT). STT is a government tax on the purchase and sale of securities registered in stock exchanges in India. The Finance Minister in her budget speech declared a huge rise in the STT rates on futures and options (F&O) trading which is a segment with high volumes and high levels of participation by retail and institutional traders.
Sitharaman suggested to increase STT in the futures contracts to 0.05% as compared to the current 0.02% which is over 50 percent. On choices, the STT on premium and the exercise of options has been raised to 0.15 per cent, according to previous charges of 0.1 and 0.125 per cent, respectively.
“I suggest that the STT on futures be increased to 0.05 percent as compared to the current 0.02 percent. STT will be increased on options premium and options exercise to 0.15%” and this is what the Finance Minister is proposing.
Traders were rattled by the announcement and the derivatives segment was especially on the receiving end of heavy selling pressure and the intraday correction was acute in the entire market.
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