Rs 11 lakh crore wiped out: Why did markets see their biggest Budget-day fall in six years?

Indian equity markets witnessed their sharpest Budget-day decline in six years after a volatile special trading session on February 1, 2026, as investors reacted strongly to unexpected tax changes announced in the Union Budget 2026-27.

A steep hike in derivatives-related taxes, persistent foreign investor withdrawals, rising volatility indicators and sector-specific disappointments combined to overwhelm the Budget’s longer-term growth measures, triggering a broad-based sell-off across largecaps, banks and the wider market.

While the government reaffirmed its commitment to capital expenditure-led growth, near-term market sentiment deteriorated rapidly as higher transaction costs and the absence of direct incentives for foreign portfolio investors weighed heavily on confidence.

How did markets fare on Budget Day?

The Budget session on Sunday
began on a relatively stable note, with benchmark indices initially showing mild gains as investors awaited clarity from Finance Minister Nirmala Sitharaman’s speech.

However, sentiment shifted decisively once details of changes to the Securities Transaction Tax (STT) were announced, setting off a wave of profit-booking and aggressive selling.

The Sensex saw a dramatic intraday swing, plunging as much as 2,370.36 points, or nearly 3 per cent, to breach the psychologically important 80,000 level and touch a low of 79,899.42.

Although some recovery emerged later in the session, the index still
ended the day at 80,722.94, registering a loss of 1,546.84 points or 1.88 per cent.

The Nifty followed a similar trajectory, falling sharply to an intraday low of 24,571.75, down nearly 3 per cent from its previous close. It eventually settled at 24,825.45, marking a decline of 495.20 points or 1.96 per cent.

The scale of the fall made it the weakest Budget-day performance for the indices since 2020, reflecting a sharp erosion in investor confidence.

The sell-off resulted in significant wealth erosion, with around Rs 11 lakh crore wiped out from the market capitalisation of BSE-listed companies during the session.

Market breadth underscored the intensity of the decline, as declining stocks significantly outnumbered advancing shares, while only a small number of stocks remained unchanged.

Which sectors led the decline?

The downturn was broad-based, with sharp losses across banking, capital market-linked stocks and several heavyweight index constituents.

Public sector banks were among the worst hit, as the Nifty Public Sector Bank index dropped over 4 per cent, making it the weakest-performing sectoral index of the day.

Shares of Bank of India and Bank of Baroda led the losses within the PSU banking space, falling by around 7 per cent and 6 per cent respectively.

Other lenders such as Indian Bank also declined, while UCO Bank and Punjab & Sind Bank posted relatively smaller losses of about 2 per cent and 2.7 per cent. Notably, all 12 stocks in the PSU bank index ended the session in negative territory.

Large private and state-owned names also faced selling pressure. State Bank of India declined over 5 per cent, while Adani Ports lost more than 5 per cent. Stocks such as Bharat Electronics, ITC, Tata Steel, UltraTech Cement and Reliance Industries were also among the key laggards on the benchmark indices.

The pressure extended beyond frontline stocks. Bank Nifty ended the session down around 2 per cent, reflecting broader weakness in the financial sector. In the midcap space, MCX emerged as one of the steepest losers, plunging over 11 per cent.

The Nifty Midcap 100 declined by more than 2 per cent, while the Nifty Smallcap 100 fell nearly 3 per cent, indicating that risk aversion was not confined to large-cap stocks alone.

A few pockets of resilience were visible, with select IT and defensive stocks managing to close higher. Tata Consultancy Services, Infosys, Sun Pharma and Titan were among the limited gainers, offering some support to the indices amid the widespread sell-off.

What triggered the biggest Budget-day fall in 6 years?

STT hike on derivatives

The central trigger for the sharp market reaction was the government’s decision to raise the Securities Transaction Tax on derivatives trading. The announcement came as a surprise to many participants, particularly given the dominant role of futures and options in daily market volumes.

Finance Minister Nirmala Sitharaman outlined the changes during her Budget speech, stating that
the STT on futures contracts would be increased to 0.05 per cent from the earlier rate of 0.02 per cent.

She also said, “STT on options premium and exercise of options are both proposed to be raised to 0.15 per cent from the present rate of 0.1 per cent and 0.125 per cent respectively.”

The government indicated that the measure was intended to curb excessive speculation in the high-volume futures and options segment.

However, market participants said the immediate impact was a sharp increase in transaction costs for active traders, particularly those engaged in short-term and high-frequency strategies.

The reaction was swift across broking, capital market and trading-heavy stocks, as investors priced in the potential impact on volumes, margins and liquidity.

Analysts warned that while the move may reduce speculative excesses, it could also dampen participation, especially from retail traders, in the near term.

Foreign investors still on the sidelines

Another major factor behind the market decline was the continued absence of foreign portfolio investors from Indian equities. FPIs have already remained cautious amid global risk-off sentiment, elevated US bond yields and currency pressures.

Equity outflows by FPIs crossed Rs 41,000 crore in January 2026 alone, while cumulative selling since the start of 2025 stands at around $23 billion.

Analysts said the Budget did little to alter this trend, as there were no major announcements offering direct tax relief or incentives to improve post-tax returns for overseas investors.

While the Budget proposed allowing people outside India to invest more freely in listed companies by raising individual and overall limits, market participants said these measures were unlikely to offset the near-term impact of higher transaction taxes, particularly for derivative-oriented investors.

Foreign investor selling in January also reached a five-month high, further weakening market sentiment and making equities more vulnerable to negative triggers on key event days such as the Budget.

PSU banks and policy uncertainty

Public sector bank stocks faced additional pressure following the Finance Minister’s announcement of plans to set up a new committee to review the banking and finance sector.

The lack of clarity around the scope and implications of the review led investors to pare exposure to PSU lenders.

At the same time, expectations that the government might increase foreign institutional investment limits in banks were not met, adding to disappointment within the sector. As a result, PSU banks emerged as the weakest pocket of the market during the session.

Commodities, currency and global risks

The Budget-day sell-off coincided with continued weakness in commodities, particularly metals.

On the MCX, silver fell sharply by around 9 per cent, while gold futures declined by about 3 per cent, adding to pressure on market sentiment.

The rupee also remained under pressure, and there were no major surprises in January GST collections to provide immediate comfort.

Global uncertainties, including concerns around US-India trade negotiations and broader protectionist trends, continued to loom over markets.

Investors remain uncertain

Investor unease was reflected in a sharp jump in volatility indicators. The India VIX, which measures expected market volatility, rose by more than 10-12 per cent during the session to around 15.10.

Such a rise typically signals heightened nervousness among investors and is often associated with increased short-term fluctuations and cautious positioning.

The spike in volatility amplified selling pressure, as traders cut exposure amid uncertainty over how higher transaction taxes could affect market dynamics in the days ahead. Analysts noted that elevated volatility does not necessarily translate into higher trading activity if transaction costs continue to rise, particularly in derivatives-heavy segments.

What was seen as positive in today’s Budget-day market?

Despite the sharp market reaction, analysts acknowledged that the Budget maintained a strong focus on capital expenditure and long-term growth.

The government
raised capital outlay for FY27 to Rs 12.2 lakh crore, up from around Rs 10 lakh crore in FY26, representing a high-single-digit increase.

According to Crisil, the increase in capex is broadly in line with expectations, although it may fall short of what is required to fully meet infrastructure needs.

The assessment also suggested that private sector investment will need to accelerate, with asset monetisation likely to play a key role in crowding in private capital over the medium term.

The capex push is expected to support sectors such as infrastructure, construction, capital goods, steel, cement and banking over the medium to long term. Higher allocations were also announced for rail corridors, urban development, manufacturing, semiconductors and clean energy.

Beyond the headline numbers, the Budget included several sector-specific measures that markets are still digesting.

One notable announcement was
a tax holiday until 2047 for foreign companies providing global cloud services using India-based data centres, a move expected to encourage investment in digital infrastructure.

The government also reiterated its push for manufacturing across seven strategic sectors, with higher allocations for semiconductors, bio-pharma and clean energy.

Continued support for MSMEs, logistics modernisation, textiles, electronics and renewable energy was also outlined through targeted schemes, including mega parks and duty exemptions.

What have experts said?

Market participants and investment professionals broadly agreed that the STT hike was the single most important factor behind the sharp Budget-day sell-off.

Ashwani Dhanawat, Executive Director and Chief Investment Officer, Shriram General Insurance, said, “the hike in Securities Transaction Tax (STT) on futures and options—futures to 0.05% (from 0.02%) and options premium/exercise to 0.15 per cent (from 0.1 per cent/0.125 per cent) — is a negative for active traders and the derivatives ecosystem. It raises transaction costs, potentially curbing speculative volumes, impacting liquidity in F&O, and contributing to immediate market pressure (e.g., Sensex/Nifty drops post-announcement). 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.”

Samir Arora of Helios Capital told CNBC-TV18 that the market reaction stemmed from an unexpected negative rather than unmet expectations. According to him, the STT increase came as a shock to investors and could have a lingering impact on sentiment.

Somil Mehta, Head of Retail Research at Mirae Asset Sharekhan, said investors had been anticipating some relief on long-term and short-term capital gains taxes to support foreign portfolio investors. Instead, the increase in STT raised trading costs and hurt near-term confidence. He added that higher STT is broadly negative for liquidity and could weigh on markets in the short term.

What next for markets?

In the near term, analysts expect volatility to remain elevated as investors adjust to higher transaction taxes, persistent FPI outflows and global uncertainties.

However, several market participants believe that the absence of further negative surprises could help stabilise sentiment over time.

ArunaGiri, CEO of TrustLine Holdings, said the market reaction appeared largely knee-jerk, with attention disproportionately focused on STT changes rather than underlying fundamentals.

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.

From a broader perspective, Amar K Ambani, Executive Director, YES Securities, said, “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.”

For now, Indian equities remain caught between near-term pressure from higher trading costs and the longer-term promise of capex-led growth — a tension that is likely to define market direction in the sessions ahead.

(The views and opinions expressed by experts/brokerages in this article are their own.

(With inputs from agencies)