Budget scores 4/10: Stability delivered, market competitiveness compromised

Jimeet Modi is the Founder & CEO at SAMCO Group

• Fiscal discipline remains intact
• Budget loses meaningful points on Global Capital Attractiveness, primarily due to increase in STT on derivatives
• Budget protects the sovereign balance sheet

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On our India Budget Strength Index, this budget scores 4/10. It is a largely defensive budget—successful in preserving fiscal stability, but one that misses a critical opportunity to strengthen India’s capital-market competitiveness and growth appeal.

While fiscal discipline remains intact, the budget loses meaningful points on Global Capital Attractiveness, primarily due to the increase in Securities Transaction Tax (STT) on derivatives.

* STT on futures has been raised from 0.02% to 0.05% of contract value

* STT on options premium increased from 0.10% to 0.15%

These changes materially raise the cost of derivatives trading per transaction. This is not a marginal or technical tweak—it directly impacts market microstructure.

Why the STT Hike Matters: The Impact Chain

The second-order effects are critical:

Higher STT on derivatives->

Lower derivatives volumes->

Lower cash market participation->

Reduced overall liquidity->

Higher liquidity premium demanded by global investors->

Higher cost of capital for India->

Gradual capital reallocation to competing markets

Derivatives markets are not merely speculative venues. They are liquidity engines, hedging mechanisms, and price-discovery tools that underpin the cash market. Weakening this ecosystem has consequences far beyond F&O traders.

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Direct Market Impacts

• Active and high-frequency traders face a materially higher tax burden on every trade. Given the high turnover nature of derivatives, even modest STT increases can erase strategy profitability, raising breakeven thresholds.

• Hedging costs rise, discouraging efficient risk management via futures and options.

• Arbitrage margins compress, particularly in already tight pricing environments.

• Retail traders, many operating with thin per-trade profitability, are likely to reduce trade frequency and position sizes.

Historically, higher transaction costs correlate strongly with lower volumes. In India’s case, liquidity—especially in the F&O segment—is heavily driven by short-term participation. Higher friction can suppress derivatives activity by up to ~30% from current levels, with spillover effects into the cash market.

For foreign participants, the response is even simpler: capital migrates to jurisdictions where friction is lower and market access cleaner.

Global Capital Reality Check

India competes for global capital against the U.S., ASEAN economies, and other emerging markets. At a time when India needs to deepen liquidity and attract global flows, increasing trading friction sends the wrong signal.

For years, India has operated under the assumption that foreign capital will return naturally—driven by demographics, GDP growth, and a compelling long-term narrative. But global capital does not invest in stories. It invests in risk-adjusted returns, measured in USD terms.

On that front, the data offers a stark warning.

Over the past 14+ years, Indian equities (NIFTY, USD returns) have delivered consistently inferior rolling returns on both 1-year and 3-year horizons when compared with the three most influential U.S. benchmarks - S&P 500, Nasdaq, and Russell 2000.

More concerning than lower returns is higher risk. Indian equities have exhibited:

• Deeper drawdowns

• Lower Sharpe ratios

• Greater volatility for inferior reward

In contrast, US indices delivered higher CAGR, stronger rolling returns, and materially superior risk-adjusted performance.

For a global allocator—whether a pension fund, sovereign wealth fund, or institutional CIO—the implication is clear:

There is no portfolio-level compulsion to allocate incremental capital to India.

The STT hike on derivatives only exacerbates this disadvantage, increasing friction at precisely the wrong point in the cycle.

Conclusion:

• Fiscal stability: Achieved

• Capital-market competitiveness: Diluted

• Liquidity depth: At risk

• Cost of capital: Likely to rise at the margin

This budget protects the sovereign balance sheet—but under-delivers on positioning India as a globally competitive capital market.

Stability delivered. Market competitiveness compromised.