Union Budget doesn't woo FPIs despite Rs 1.6 lakh crore selloff

Higher STT may weigh on FII derivatives participation.

• Budget 2026 lacks relief for foreign investors, long-term capital gains tax.
• STT on futures raised to 0.05%, options premium and exercise to 0.15%
• Higher STT may lower FII participation in derivatives, affecting market liquidity

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The Union Budget 2026 did not contain much for foreign institutional investors, who have been offloading their holdings in the Indian equity markets for the past year, offloading Rs 1.6 lakh crore in the previous year.

Consensus expectations suggested that with no relief on long-term capital gains, the outlook on Indian equities along with the tax burden, remain unchanged. "The budget offered no direct currency stabilization measures or FPI incentives to reverse capital outflows driving this weakness," said Subho Moulik, Founder & CEO, Appreciate.

To meaningfully revive sustained FPI inflows, investors will be looking more closely at macro stability, rupee movement, and consistency in tax policy rather than just growth optics.

However, some experts suggested that by avoiding welfare measures and populist schemes, instead focusing on monetary stability and fiscal prudence, the Budget provides the predictability required to stem recent FII outflows and stabilize the rupee.

"In a year marked by global trade volatility and aggressive US tariffs, the government’s adherence to fiscal consolidation—aiming for a deficit glide path near 4%—is the 'stability premium' foreign investors were looking for," said Vaibhav Mittal, Partner, Khaitan.

Impact of STT hike

The Union Budget also proposed that the Securities Transaction Tax be hiked on futures and options. The STT on futures was proposed to be hiked from 0.02 percent to 0.05 percent. Also, the STT on options premium and on options exercise has been hiked to 0.15 percent, as compared to the existing STT on options premium of 0.10 percent and on options exercise of 0.125 percent.

For the month of January, foreign investors were continuing to remain sellers, selling over Rs 41,000 crore. The global risk-off sentiment, coupled with falling rupee and higher U.S. bonds, made Indian equities look unattractive.

"In this context, a higher STT further reduces post-tax returns, making India relatively less competitive for short-term and derivative-oriented foreign flows," said Aakash Shah, Technical Research Analyst at Choice Equity Broking.

FII participation in derivatives may also moderate as post-tax trading efficiency declines, impacting overall liquidity, added Raj Gaikar, Research Analyst, SAMCO Securities. This can create a cascading effect on revenue streams of broking companies, exchanges, AMCs, and depositories, which are closely linked to market turnover.

"With derivatives volumes already shrinking in recent months, the hike may further pressure near-term earnings visibility. While fiscally supportive, the measure poses headwinds for capital-market-linked stocks," Gaikar noted.

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