Budget 2026 Triggers Market Crash: Sensex Plummets as STT Hike Spooks Investors

A Sharp Reversal on Budget Day

The Indian stock market witnessed a dramatic reversal on February 1, 2026, as the Union Budget presentation triggered a widespread sell-off, erasing all early gains. What began as an optimistic session quickly turned volatile after Finance Minister Nirmala Sitharaman announced an unexpected hike in the Securities Transaction Tax (STT) on derivatives. The benchmark indices, Sensex and Nifty, which had started the day on a positive note, plunged sharply from their intra-day highs, reflecting acute investor disappointment.

Morning Optimism Gives Way to Afternoon Plunge

Ahead of the 11 am budget speech, market sentiment was buoyant. The BSE Sensex climbed 457 points to reach an intra-day high of 82,726.65. Similarly, the NSE Nifty 50 advanced 120 points to touch 25,440.90. However, the mood soured as details of the budget emerged. By early afternoon, a wave of profit-booking and fresh selling dragged the indices deep into the red. The Sensex tumbled to a low of 79,899, marking a staggering fall of 2,828 points from its peak. The Nifty followed suit, dropping 869 points from its high to a low of 24,572.

The STT Hike: A Primary Catalyst for the Crash

The most significant trigger for the market's decline was the proposal to increase the STT on futures and options (F&O) trading. The Finance Minister announced a hike in STT on futures trading to 0.05% from the existing 0.02%. For options, the STT on premium was raised to 0.15% from 0.10%. This move came as a surprise to market participants, many of whom were anticipating a reduction in transaction taxes to boost market activity. The increase in STT directly raises the cost of trading in the derivatives segment, which is a major source of volume and liquidity for the Indian markets. Analysts noted that this could particularly impact high-frequency traders, arbitrageurs, and foreign portfolio investors (FPIs) who use derivatives extensively.

Unmet Expectations and Other Concerns

Beyond the STT hike, several other factors contributed to the negative sentiment. Investors were disappointed by the absence of expected relief measures, particularly concerning capital gains tax. There were widespread expectations that the government might rationalize the Long-Term Capital Gains (LTCG) tax structure, but the budget remained silent on this front. Furthermore, the budget did not introduce any specific measures aimed at improving capital flows from foreign investors, who have been net sellers in the preceding month. The announcement of a higher disinvestment target of Rs 80,000 crore for FY27 also raised concerns about an increased supply of government paper, which could absorb market liquidity.

Broad-Based Market Impact

The sell-off was not confined to the headline indices but was broad-based, indicating widespread risk aversion. The India VIX, a gauge of market volatility and fear, surged by over 17% to 15.66, signaling heightened nervousness among investors. Sectoral indices witnessed deep cuts, with the Nifty PSU Bank index emerging as the worst performer, falling over 4%. Shares of Bank of India and Bank of Baroda slumped by 7% and 6%, respectively. Stocks linked directly to market activity, such as brokerage firms and exchanges, faced intense selling pressure. Shares of BSE Ltd and Angel One tumbled by as much as 15% and 10% respectively. Heavyweights like State Bank of India and Reliance Industries also contributed significantly to the decline, falling nearly 5% and 2.5% respectively.

Expert Commentary on the Market Reaction

Market experts were quick to analyze the budget's impact. Shripal Shah, CEO of Kotak Securities, commented that the steep increase in STT could dampen derivatives activity and reduce trading volumes, suggesting the government's intent might be to moderate excessive trading rather than maximize revenue. Amar K Ambani of YES Securities highlighted that the STT hike, combined with the absence of measures to address FPI outflows, weighed on sentiment. He also pointed to the higher disinvestment target as a concern for market liquidity. Analysts largely agreed that while the budget's focus on capital expenditure (hiked to Rs 12.2 lakh crore) and infrastructure was a long-term positive, the near-term headwinds created by higher transaction costs and unmet expectations overshadowed these aspects.

Technical Outlook and Path Ahead

From a technical standpoint, Anand James, Chief Market Strategist at Geojit Investments, noted that the Nifty had managed to hold above its key support level around the 25,180 region. He suggested that the market could witness swings as it attempts to find a new equilibrium. The immediate focus for investors will be to digest the implications of the budget announcements. The market's direction will likely be influenced by clarifications from the government, global market trends, and the behavior of foreign institutional investors in the coming sessions.

Conclusion

The Union Budget 2026 proved to be a day of high drama for the Indian stock market. A promising start was completely undone by an unexpected hike in STT and the disappointment of unmet investor expectations. While the government's continued push for infrastructure and fiscal discipline provides a stable long-term outlook, the immediate market sentiment has turned cautious. Investors are now advised to remain selective, focus on sectors with strong policy support, and adopt a defensive stance to navigate the post-budget volatility.