Why markets reacted so sharply
The sharp sell-off was triggered primarily by unexpected tax measures rather than by what the Budget did not deliver. The government raised the securities transaction tax on futures and options, increasing costs for derivatives traders at a time when market sentiment was already fragile.
Samir Arora of Helios Capital told CNBC-TV18 that markets could see more downside. He said the issue was not that expectations were unmet, but that something negative came in that investors were not prepared for. According to him, the hike in STT was a clear shock for the market and could have lasting implications for sentiment.
Somil Mehta, Head of Retail Research at Mirae Asset Sharekhan, said investors had been hoping for relief on long-term and short-term capital gains tax, especially to support foreign portfolio investors. Instead, the government raised STT on futures and options, which has increased trading costs and hurt near-term confidence. He said higher STT is broadly negative for liquidity and could weigh on markets in the near term.
The broking and capital market segments were among the worst hit, as higher transaction costs are expected to compress margins and dampen trading volumes. Analysts warned that volatility alone may not translate into higher activity if costs continue to rise.
ArunaGiri, CEO of TrustLine Holdings said today’s market reaction appears largely knee-jerk, with attention skewed towards STT changes rather than long-term fundamentals.
FPIs still missing from the market
A key overhang for Indian equities remains the absence of foreign portfolio investors. FPIs have already sold more than $23 billion worth of Indian equities over the past year, and analysts say the Budget did little to change that narrative.
There were no big announcements on capital gains tax relief or other direct incentives that could improve post-tax returns for foreign investors. While the Budget did propose allowing people outside India to invest more freely in listed companies by raising individual and overall limits, analysts said this is unlikely to offset the impact of higher transaction taxes in the near term.Jashan Arora, Director at Master Trust Group, said markets are likely to remain volatile and largely range-bound in the near term as higher transaction costs weigh on sentiment, particularly in derivatives. He added that this could lead to more cautious participation from retail traders as well, adding to short-term uncertainty.
Capex is the big positive
While the near-term reaction has been negative, analysts agree that the biggest positive from the Budget lies in the strong push on capital expenditure. The government has raised capex for FY27 to Rs 12.2 lakh crore from around Rs 10 lakh crore in FY26, a clear double-digit increase.
This capex-led approach is expected to support infrastructure, construction, capital goods, steel, cement and banking sectors over the medium to long term. The Budget also proposed higher spending on rail corridors, urban development, manufacturing, semiconductors and clean energy.
Defence spending was another key positive. Defence capex has been increased by around 18% to Rs 2.19 lakh crore, reinforcing the government’s focus on strategic preparedness and domestic manufacturing.
Ajit Mishra, SVP at Religare Broking, said the Budget reflects continuity with conviction, balancing growth and fiscal discipline amid global uncertainty. He noted that sustained emphasis on infrastructure, manufacturing, defence and energy security strengthens India’s medium-term growth engine and improves earnings visibility for companies linked to public spending.
Other positives hidden in fine print
Beyond headline capex numbers, the Budget contained several sector-specific positives that markets are still digesting. The government announced a tax holiday until 2047 for foreign companies providing global cloud services using India-based data centres, which could support investment in digital infrastructure.
There was also a push for manufacturing across seven strategic sectors, higher allocations for semiconductors, bio-pharma and clean energy, and continued support for MSMEs and logistics modernisation. Textiles, electronics and renewable energy players also stand to benefit from targeted schemes such as mega parks and duty exemptions.
Feroze Azeez, Joint CEO of Anand Rathi Wealth, said while the STT hike could lead to near-term volatility and lower derivative volumes, the broader policy framework remains supportive for long-term investors focused on fundamentals rather than trading activity.
Will markets fall further?
In the near term, analysts expect volatility to remain high. Higher transaction taxes, weak FPI flows, a falling rupee and global uncertainties are likely to keep sentiment cautious. However, many analysts also believe that the absence of further negative surprises could itself become a stabilising factor.
The Budget has avoided aggressive fiscal tightening, maintained growth momentum and reinforced capex-led development. Jashan Arora said, investors may increasingly look for selective opportunities in banks and infrastructure rather than high-risk, transaction-driven segments.
“Markets will remain sensitive to continued FPI outflows, further possible INR depreciation, and their combined impact on equities, particularly against the backdrop of global trade uncertainty, recent softness in global commodity prices, and a balance of payments position that is not particularly strong. From a longer-term perspective, the Budget continues to support India’s growth trajectory, with a clear focus on employment generation and allocations to emerging and priority areas,” said Amar K Ambani, Executive Director, YES Securities.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
