What happened as NSE publicly signalled hope for an STT review after the Budget hike
India’s largest stock exchange said it is hopeful that the recent increase in securities transaction tax (STT) on futures and options (F&O) trades could be reviewed and rationalised, even as it cautioned that the effect on trading volumes is difficult to predict at this stage.
Speaking during an investor call on Monday, National Stock Exchange (NSE) management said many market participants had expected some rationalisation or reduction in STT—particularly in the cash market—in the latest Union Budget. Instead, the government raised STT on both futures and options, increasing overall transaction costs for derivatives traders.
“The Union Budget was expected to reduce. Many people in the market were expecting that there could be a slight reduction in STT for cash market, but that did not happen. On the contrary, we have seen a small hike in both futures and options, STT,” NSE management said on the call.
The exchange indicated that multiple industry representations have been made to the government seeking a reconsideration. While it stopped short of predicting a policy change, it said it is “hopeful that some review might be undertaken.”
Why the STT increase matters for derivatives markets and policy signals
The debate around STT is significant because India’s derivatives market is among the most active globally by contract volumes, and transaction costs directly influence trading behaviour, hedging strategies and market liquidity.
Higher STT raises the cost of entering and exiting positions. For short-term traders, this can affect strategy viability, while for institutional participants and long-term investors, it can alter the economics of hedging.
NSE management said the latest increase is viewed as particularly negative for index and single-stock futures, which are widely used for hedging rather than speculative trading.
“The increase in STT is seen as a negative for index futures and stock futures, single stock futures in particular, because futures are generally seen as genuine instruments for hedging by long-term investors,” the management said. “They are not the instrument of choice for those who are traders.”
For policymakers, the issue sits at the intersection of revenue considerations, market stability and investor protection—areas that have increasingly shaped India’s capital market reforms over the past year.
What we know so far about the scale and direction of concerns
Several points have emerged from exchange commentary and industry feedback:
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STT has been increased on both futures and options in the latest Budget
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Market participants had widely expected rationalisation or reduction instead
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Industry bodies and intermediaries have made representations to the government
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The exchange sees the hike as more negative for futures than options
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NSE says the eventual impact on volumes is not yet quantifiable
NSE noted that in past instances, periodic increases in STT did not always lead to a significant or sustained decline in derivatives volumes, as markets often absorbed higher costs over time.
This historical pattern suggests that behavioural adjustment, rather than immediate contraction, could be the more typical response—though the current market structure and regulatory backdrop differ from earlier cycles.
What remains unclear as markets await policy signals and data trends
Despite the concerns, several uncertainties remain.
It is not yet clear:
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Whether the government is actively considering a review of the STT hike
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How quickly any policy response might materialise
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Whether volumes in futures and options will show measurable shifts in coming months
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How institutional hedging behaviour might adjust over time
NSE itself said the actual impact on derivatives volumes is difficult to quantify at this stage. Derivatives activity can be influenced by multiple factors including volatility, macro events and global cues, making it hard to isolate the effect of a tax change in the short term.
Detailed post-Budget volume trends and broker-level data will likely be closely watched for early signals.
How the derivatives ecosystem and trading segments could feel the impact
The immediate impact is concentrated in the F&O segment, where transaction costs are a critical variable for strategy design.
Key areas of potential impact include:
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Index and single-stock futures, where hedging demand is structurally important
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Institutional risk management, particularly for portfolios using futures overlays
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Liquidity conditions, if higher costs reduce participation at the margin
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Retail derivatives activity, already subject to tighter regulations in recent years
Broker body ANMI (Association of National Exchanges Members of India) has taken a more pointed stance, urging the government to review the hike.
ANMI said the increase disproportionately affects futures trading, where total transaction costs have nearly doubled, compared with a relatively modest 3% rise in options. It warned that higher costs could hurt liquidity, risk management and participation.
The body also argued that Indian markets are already costlier than many global peers, and that retaining the earlier STT structure would help restore stability and confidence.
How the broader policy backdrop shows a steady tightening of derivatives norms
The STT discussion comes amid a broader regulatory push to recalibrate derivatives markets.
Over the past year, regulators have introduced and proposed several measures aimed at investor protection and risk containment, particularly in segments with high retail participation.
On the proposal to withdraw calendar spread margin relief, NSE said discussions are ongoing between broker associations and regulators. The final decision will rest with the regulator, with an emphasis on safeguarding small investors.
Industry representations have highlighted that retail participation in single-stock futures and options is already limited and has declined further over the past year following successive reforms. NSE said it remains uncertain how far these submissions will shape the final decision.
Together, these developments indicate a regulatory environment that is becoming more cautious about leverage and speculative activity.
What officials and industry voices are saying about costs and competitiveness
While NSE’s tone has been measured, broker associations have been more vocal about competitiveness.
ANMI said higher transaction costs could make Indian markets less attractive relative to global counterparts, especially for sophisticated participants who compare cross-border trading costs.
The exchange, for its part, has not framed the issue in terms of competitiveness but has highlighted the hedging role of futures and the importance of keeping them viable for genuine risk management.
Separately, to support liquidity in the cash market, NSE pointed to the securities lending and borrowing (SLB) framework as an area ripe for reform. The Securities and Exchange Board of India (SEBI) has constituted a working group to review the existing SLB mechanism.
Any easing of SLB norms could, in theory, improve market depth and provide alternative avenues for hedging and arbitrage, partially offsetting cost pressures elsewhere.
What it means for investors and market intermediaries navigating cost shifts
For institutional investors, the key issue is the cost-efficiency of hedging strategies. Even small changes in transaction taxes can materially affect large, frequently rolled positions.
For brokers and intermediaries, higher taxes can compress trading volumes at the margin and influence client behaviour, though past experience suggests activity does not necessarily fall in a straight line.
For retail participants, the combined effect of higher costs and tighter rules could gradually steer activity toward lower-risk or longer-term products.
Key takeaways for stakeholders include:
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Transaction costs are becoming a more central variable in strategy selection
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Hedging via futures may require recalibration if costs stay elevated
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Policy direction currently favours prudence over rapid market expansion
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Market adaptation has historically cushioned the impact of tax changes
What to watch next as markets look for clarity on direction
Several triggers will shape the next phase of the debate:
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Any government signal on reviewing or rationalising STT
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Trends in F&O volumes in the quarters following the hike
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SEBI’s decisions on calendar spread margins and SLB reforms
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Feedback from institutional investors and large hedgers
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Broader volatility conditions, which often drive derivatives demand
If volumes remain resilient, the policy may be seen as absorbed by the market. If activity slows meaningfully, pressure for reconsideration could intensify.
For now, the message from the exchange is cautious but clear: while hope for a review exists, the real test will be how market behaviour evolves under the new cost structure.
