Stock market selloff: 3 key reasons behind Nifty, Sensex fall. Analysts decode Budget 2026

Union Budget 2026 largely met analyst expectations, but three factors unsettled investors. Analysts said they did not expect a shift in capital gains taxation and none materialised. But no direct measure aimed at improving foreign flows, Securities Transaction Tax (STT) on futures and options and higher divestment target weighed in on investor sentiment. 

“First, the increase in Securities Transaction Tax (STT) for Futures and Options came as a surprise, especially when some market participants were expecting a reduction. Second, at a time when foreign investors have been net sellers and the rupee has been under pressure, the absence of any direct measures addressing capital flows or currency stability weighed on sentiment,” said Amar K Ambani, Executive Director at YES Securities.

Ambani feels the markets will remain sensitive to continued FPI outflows, further possible rupee 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. 

“Additionally, the higher disinvestment target of Rs 80,000 crore for FY27 raises some concerns, as market liquidity is already being absorbed by strong primary market issuance, with PSU disinvestment adding to the overall supply of paper,” he said.

The STT hike sent the Sensex plunging 2,370.36 points, or 2.88 per cent, to hit a low of 79,899.42. Nifty also fell 748.9 points, or 2.95 per cent, to 24,571.75, before recovering part of the losses later in the session. 

Sensex eventually settled at 80,722.94, down 1,546.84 points or 1.88 per cent. Nifty ended the day at 24,825.45, down 495.20 points or 1.96 per cent.

Pranav Haridasan, MD and CEO at Axis Securities said continued momentum in infrastructure spending, with a clear thrust on transport corridors, high-speed rail and digital infrastructure, is a strong positive.

He said market unease, however, is centred on the increase in STT on F&O, particularly the sharper hike on futures. This comes on the back of higher capital gains taxes last year, raising overall transaction costs for market participants. 

“Futures are a margined, risk-managed product and not typically the primary source of retail excess, which raises questions on whether higher STT will deliver the desired outcome or instead weigh on liquidity, participation and India’s market cost competitiveness. These concerns are being voiced by foreign investors and domestic traders, and are reflected in the immediate market reaction,” he said.

While aimed at moderating excessive derivatives activity and boosting revenue, it could dampen retail participation in a bull phase and affect broking revenues short-term.
 
“Net-net, this is a growth-focused, simplification-heavy budget with strong welfare and infra underpinnings—balanced by prudent revenue measures. The buyback tweak is a clear win for equity market health, while the STT increase tempers enthusiasm in high-frequency trading circles. Execution and market adaptation will define its success in the coming year,” said Manish Jain, Managing Director & CEO at Bajaj Broking.

Roopali Prabhu CIO and Head of Products and Solutions at Sanctum Wealth said the expectations from the Budget were modest, given subdued growth in income tax collections and the government’s strong commitment to fiscal deficit targets. He said the government’s continued adherence to fiscal discipline, with a FY27 deficit target of 4.3 per cent comes as a relief. 

“Overall, there are no major catalysts for the equity market, although select sectors such as pharma, chemicals and textiles have seen some positive announcements,” he said.

Vaqarjaved Khan, Senior Fundamental Analyst at  Angel One Ltd felt the Budget struck a prudent balance between growth and fiscal discipline, with FY27 fiscal deficit targeted at 4.3 pre cent of GDP and capex hiked to Rs 12.2 lakh crore, signalling sustained infrastructure push. 

Key positives, he said, include enhanced incentives for manufacturing, semiconductors, biopharma, textiles, and MSMEs via a Rs 10,000 crore funds, alongside boosts for agriculture, defence, and clean energy positioning these sectors for accelerated expansion. 

“The rationalized TDS/customs duties and tax slab simplifications ease compliance, fostering business confidence. For Indian markets, while the STT hike on F&O triggered a knee-jerk sell-off, the focus on jobs, exports, and reforms should support long-term equity upside, especially in infra, renewables, and export-oriented plays, amid resilient 6.8–7.2 per cent GDP projections,” he said.