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Budget 2026: A Budget Day Bloodbath on Dalal Street
Indian equity markets witnessed a brutal sell-off on Budget day, February 1, 2026, as Finance Minister Nirmala Sitharaman’s fiscal roadmap for 2026-27 failed to meet Dalal Street’s elevated expectations. The benchmark Nifty 50 index plummeted 2.96% to 24,571.75, while the BSE Sensex crashed 2.88% to 79,899.42, shedding 1,047.81 points in what turned into one of the most dramatic Budget day reactions in recent years.
At the worst point during the session, the Sensex had plunged nearly 2,400 points, while the Nifty fell around 750 points, reflecting deeply negative sentiment across the market. The sharp decline came despite the budget being presented on a rare Sunday trading session, with investors clearly disappointed by several key announcements—or the absence thereof.
The Five Key Triggers Behind the Market Crash
1. STT Shock: The Primary Culprit
The sharpest fall came immediately after Finance Minister Sitharaman announced a massive hike in Securities Transaction Tax (STT) rates on derivatives trading. This move, aimed at curbing speculative trading in the high-volume futures and options segment, triggered intense panic selling across the market.
The STT Hike Details:
Futures Contracts:
- Old rate: 0.02%
- New rate: 0.05%
- Increase: 150% (2.5x higher)
Options Premium:
- Old rate: 0.10%
- New rate: 0.15%
- Increase: 50%
Options Exercise:
- Old rate: 0.125%
- New rate: 0.15%
- Increase: 20%
“This is a meaningful jump, not a marginal tweak, and it is likely to have a direct dampening effect on F&O volumes, particularly among high-frequency traders, proprietary desks, and cost-sensitive strategies,” Aakash Shah from Choice Equity Broking explained.
What is STT?
Securities Transaction Tax is levied on the value of securities transactions carried out on recognized stock exchanges in India. It applies to trades in:
- Equities
- Equity mutual funds
- Derivatives (futures and options)
The critical aspect: STT is collected at the time of the transaction, irrespective of whether the investor makes a profit or incurs a loss. This makes it particularly burdensome for active traders and those using derivatives for hedging.
Market Impact:
The announcement devastated brokerage and exchange stocks:
- BSE shares: Crashed up to 15%
- Angel One: Plunged 10-13%
- Groww: Tanked up to 10%
Shripal Shah, Managing Director and CEO of Kotak Securities, warned: “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 reduce volumes”.
The Bigger Picture:
“Overall, while the move may support near-term tax collections, it risks reducing liquidity and market depth in the derivatives segment, at a time when regulators are already seeking to balance speculation control with maintaining India’s competitiveness as a global trading destination,” Shah added.
2. Defence Budget Confusion: Communication Gap Triggers Panic
While markets expected a major push for the defence sector during the speech, the lack of an immediate, clear announcement sent defence stocks into freefall.
The Initial Panic:
During the Budget speech, Finance Minister Sitharaman did not explicitly highlight a substantial defence allocation increase, creating confusion among investors tracking the sector live.
The Clarification:
However, a document released by the Finance Ministry shortly after Sitharaman’s speech clarified the actual numbers:
Defence Budget 2026-27:
- Total allocation: Rs 7,84,678 crore
- Previous year (2025-26): Rs 6,81,210 crore
- Increase: Rs 1,03,468 crore (15.2% growth)
Breakdown:
- Capital expenditure: Rs 2,19,306 crore
- Revenue expenditure: Rs 5,53,668 crore (including Rs 1,71,338 crore for pensions)
Specific Allocations:
- Aircraft and aero engines: Rs 63,733 crore
- Naval fleet: Rs 25,023 crore
Context:
In 2025-26, the capital outlay was initially pegged at Rs 1,80,000 crore, which increased to Rs 1,86,454 crore at the revised estimate stage. The 2026-27 capital allocation of Rs 2,19,306 crore represents a substantial 17.6% increase over the revised estimates.
Why the Confusion Mattered:
In a high-volatility, real-time trading environment on Budget day, the initial absence of a clear defence spending announcement caused knee-jerk selling in defence stocks. By the time the clarification emerged, sentiment had already turned negative, and recovery proved difficult.
This communication gap highlights the challenge of presenting complex budgets in a digital age where algorithmic and retail traders react instantaneously to perceived signals during the speech itself.
3. PSU Banks Tumble on Banking Sector Review Announcement
Shares of public sector banks crashed after Sitharaman proposed setting up a high-level committee to conduct a comprehensive review of the entire banking and financial sector, including banks and non-banking financial companies.
The Announcement:
“We will constitute a high-level committee on banking for ‘Viksit Bharat’ to examine the sector and assess measures needed to sustain reform-led growth,” Sitharaman stated.
The panel will:
- Review the structure and functioning of the banking system
- Suggest steps aligned with India’s long-term development objectives
- Assess preparedness for India’s next phase of economic growth
- Ensure the banking system evolves with the country’s development priorities
Why PSU Banks Fell:
Major PSU Bank Declines:
- Bank of India: Led losses
- Bank of Baroda: Significant decline
- Indian Bank: Sharp fall
- Overall PSU bank index fell up to 7%
Investor Concerns:
- Uncertainty about reforms: High-level committee reviews often precede major structural changes, creating uncertainty about future governance, capitalization needs, and operational models
- Potential consolidation: Previous banking sector reviews have led to bank mergers and consolidations, which can be disruptive in the short term
- Absence of immediate recapitalization: The budget lacked announcements on fresh capital infusion or credit-guarantee programs that PSU banks had hoped for
- PFC and REC restructuring: The specific mention of restructuring Power Finance Corporation and Rural Electrification Corporation signaled that similar restructuring could extend to other public sector financial institutions
Expert Views:
“PSBs may see a mixed reaction. The announcement of a high-level banking sector review committee signals potential governance and structural reforms, which could improve efficiency and investor perception over time. However, the absence of immediate recapitalization or credit-guarantee announcements may cap sharp near-term rerating,” an analyst noted.
Varun Gupta, CEO at Groww Mutual Fund, said: “The announcement of a high-level committee on banking and the proposed restructuring of PFC and REC reflect a clear intent to future-proof India’s financial system for a Viksit Bharat”.
While the long-term implications may be positive, markets reacted to the near-term uncertainty and absence of immediate positive catalysts for PSU banks.
4. Capex Disappointment: Growth Below Aggressive Estimates
Finance Minister Sitharaman announced an increase in capital expenditure to Rs 12.2 lakh crore for fiscal 2027, aiming to sustain momentum in infrastructure development and support economic growth.
The Numbers:
- FY 2027 allocation: Rs 12.2 lakh crore
- FY 2026 allocation: Rs 11.21 lakh crore
- Increase: Rs 0.99 lakh crore (8.9% growth)
Why Markets Were Disappointed:
While this represents nearly a 9% increase, it fell short of some aggressive analyst estimates that had anticipated double-digit percentage growth or a figure closer to Rs 13-13.5 lakh crore.
Analyst Perspective:
According to Crisil, the Rs 12.2 lakh crore budget outlay is in line with expectations, albeit lower than the likely need.
Context:
Given that:
- Private sector investment remains cautious
- Government capex has been the primary growth driver
- Infrastructure spending has multiplier effects on employment and GDP
Markets had hoped for a more aggressive capex push to compensate for subdued private investment appetite.
Impact on Infrastructure and Capital Goods Stocks:
The relatively modest increase disappointed investors in:
- Construction and engineering companies
- Capital goods manufacturers
- Cement and steel producers
- Infrastructure-dependent sectors
While Rs 12.2 lakh crore is still a substantial allocation and maintains growth momentum, the shortfall from expectations contributed to the broader market weakness.
5. Metals Volatility: Gold and Silver Crash
The budget was presented amid unprecedented volatility in precious metals markets, adding to overall market nervousness.
The Carnage:
- MCX Gold February futures: Fell 7.12% to Rs 1,39,000 per 10 grams (around 10 am on an intraday basis)
- MCX Silver March futures: Dipped 9% to Rs 2,65,652 per kg
Expert Perspective:
“The sharp fall in gold and silver ETFs looks scary on the screen, but it’s more of a sentiment shock than a story-breaker. Precious metals had run up sharply over the last year, and what we’re seeing now is a mix of profit-booking, global volatility and reaction to macro cues. ETFs tend to exaggerate moves on such days, both up and down,” said Akshat Garg, Head Research and Product at Choice Wealth.
Why This Mattered for Overall Markets:
The metals crash:
- Created negative sentiment spillover across asset classes
- Triggered risk-off behavior among investors
- Suggested global uncertainty and volatility
- Affected commodity-linked stocks and portfolios with gold/silver exposure
Additional Negative Factors
No Major Tax Relief
Investors had been hoping for significant relief on long-term and short-term capital gains tax, especially to support Foreign Portfolio Investors (FPIs) who have been net sellers in recent months.
The budget’s failure to reduce or rationalize capital gains taxes disappointed traders and investors who had factored in such measures.
Weak GST Numbers
The January GST collections, while positive, offered no major surprises:
- Gross GST collections: Rs 1,93,384 crore in January 2026
- Previous year: Rs 1,82,094 crore in January 2025
- Growth: 6.2%
The moderate growth rate—while respectable—didn’t provide enough positive surprise to offset other negative factors.
Weak Rupee
The Indian rupee remained under pressure, adding to concerns about foreign investment flows and import costs.
Absence of FII Limit Hike
The sector had expected an announcement regarding a hike in Foreign Institutional Investor (FII) limits in certain sectors, which did not materialize.
Sectoral Impact: Winners and Losers
Major Losers:
Brokerages and Exchanges:
- BSE, Angel One, Groww: Down 10-15%
- Direct hit from STT hike reducing derivatives trading profitability
PSU Banks:
- Bank of India, Bank of Baroda, Indian Bank: Down up to 7%
- Uncertainty from banking sector review committee
Defence (initially):
- Confusion over budget allocation caused sharp initial falls
- Partial recovery after clarification
Capital Goods and Infra:
- Modest capex growth disappointed aggressive expectations
Relatively Better Performers:
Sectors that received specific positive announcements or were less affected by the major negative triggers fared relatively better, though most still traded in the red given the overall market sentiment.
Market Recovery Prospects
Near-Term Outlook
Analysts suggest the market reaction was a combination of:
- Genuine policy concerns (STT hike’s impact on liquidity)
- Disappointment over unmet expectations (capex, tax relief)
- Knee-jerk reactions (defence budget confusion)
- Global volatility spillover (metals crash)
Fundamental Considerations
Positives from the Budget:
- Fiscal deficit target of 4.3% maintained (down from 4.4%)
- Substantial capex of Rs 12.2 lakh crore
- Defence spending increased 15.2%
- Healthcare, semiconductor, and technology initiatives
- Infrastructure focus maintained
Negatives:
- Higher transaction costs from STT
- Banking sector uncertainty
- No significant tax relief
- Capex below aggressive estimates
Conclusion: Short-Term Pain, Long-Term Positioning?
The sharp market sell-off on Budget 2026 day—with the Nifty falling 2.96% and Sensex dropping 2.88%—reflected a combination of genuine policy concerns, unmet expectations, and communication gaps.
The 150% hike in futures STT and 50% increase in options STT represents the single biggest negative for market sentiment, directly impacting trading costs and threatening to reduce derivatives liquidity that has been a hallmark of India’s market depth. Combined with PSU bank uncertainty, capex disappointment, and metals volatility, the budget delivered a cocktail of negative triggers that overwhelmed positive announcements.
However, market veterans suggest that Budget day reactions are often exaggerated. The STT hike, while painful for traders, may improve market quality by reducing excessive speculation. The banking sector review could yield long-term positives. And the Rs 12.2 lakh crore capex, while below some estimates, still represents substantial infrastructure investment.
As Shripal Shah noted, the key question is whether the STT hike achieves “volume moderation rather than revenue maximization” without permanently damaging India’s competitiveness as a global trading destination. The coming weeks will reveal whether Budget 2026’s market impact is a temporary sentiment shock or signals deeper concerns about India’s policy trajectory.