UPDATE: Indian stocks faced a dramatic sell-off today, February 1, 2026, as the government’s budget proposal to increase derivatives taxes rattled investors, prompting fears of declining market liquidity and heightened trading costs. The announcement has led to the worst Budget-day performance in six years, with the Nifty 50 plunging 1.96% and the Sensex dropping 1.88% during a special Sunday trading session.
The budget outlined a significant increase in the Securities Transaction Tax (STT) on equity derivatives: rising from 0.02% to 0.05% on equity futures, and from 0.10% to 0.15% on options premiums. Investors are concerned that this tax hike will stifle trading activity, resulting in increased market friction at a time when foreign capital is already under pressure.
Analysts highlight the lack of immediate measures to attract foreign investments back into Indian equities, which are crucial for stabilizing market conditions. Authorities did not address persistent foreign selling trends that typically influence index performance and sector leadership, especially during periods of global market volatility.
The market reaction was swift and unforgiving. Broad-based selling occurred across nearly all sectors, with brokers, exchanges, and mid- and small-cap stocks particularly hard hit. The sentiment was unequivocally risk-off, pushing investors to reassess their positions in light of the new tax regime.
Market participants are now grappling with the implications of these tax increases. The heightened costs associated with derivatives trading could lead to decreased volumes and wider spreads, amplifying market volatility on down days and complicating efforts to sustain upward price movements.
Authorities appear focused on cooling speculative excess in the currently “overheated” derivatives market rather than providing immediate support to foreign capital inflows. This strategy raises pressing questions for equity investors: Can domestic institutional buying offset the outflow of foreign capital? Will earnings and central bank policy emerge as the primary drivers once the budget’s impact wanes?
The consensus among analysts and fund managers is clear: While a derivatives tax hike may be manageable in the long run, it poses an immediate risk to investor sentiment, particularly if foreign selling pressures persist and confidence-building measures are not introduced.
As the market continues to react, investors are urged to stay informed on developments regarding potential policy responses aimed at easing these concerns. The urgency is palpable as the financial landscape shifts, and all eyes are on how the government will navigate these challenges in the coming weeks.
This unfolding situation is crucial for anyone engaged in Indian equities, and the implications of today’s budget announcement could resonate throughout the broader market landscape. Share this article to keep your network updated on these critical developments.
