Budget 2026: Sensex Crashes 1,547 Points as STT Hike Rattles Markets Amid Seismic Policy Reforms

India's stock markets witnessed historic volatility on Budget Sunday, February 1, 2026, as Finance Minister Nirmala Sitharaman's Union Budget delivered a transformative policy package that sent shockwaves through Dalal Street. The Sensex crashed 1,547 points (-1.88%) to settle at 80,722.94, while the Nifty 50 plunged 495 points (-1.95%) to 24,825.45, erasing approximately ₹6 lakh crore in investor wealth in a single session.

The day's trading—a rare Sunday opening—epitomized the duality of India's current economic strategy. While the government introduced aggressive supply-side reforms to position India as a global manufacturing powerhouse, immediate demand-side measures and tax adjustments rattled short-term market sentiment. At the heart of the turmoil was a steep hike in Securities Transaction Tax (STT) on derivatives, designed to cool speculative fervor but resulting in a sharp sell-off across brokerage and banking stocks.

1. The STT Shock: Derivatives Market Faces Existential Disruption

The single most impactful announcement of Budget 2026 was the dramatic increase in STT on the derivatives segment. This move represents a direct intervention to curb excessive speculation in a market that has seen an explosion in retail participation.

New STT Rate Structure

Market Carnage and Sectoral Impact

The immediate reaction was brutal. The Sensex plummeted 2,828 points from its intraday high of 82,727 to a low of 79,899, while the India VIX (Volatility Index) surged 17% to 15.66. The brokerage ecosystem bore the brunt of the decline:

• BSE Ltd and Angel One collapsed by up to 15%.
• CDSL and 5Paisa Capital saw significant double-digit drops.
• Heavyweights like State Bank of India (down 5.5%) and Reliance Industries (down 2.5%) also suffered.
• The PSU Bank index emerged as the worst-performing sector, shedding over 4%.

Industry experts like Shripal Shah of Kotak Securities suggest that the hike will significantly raise impact costs for traders and arbitrageurs, likely leading to a 20-30% volume compression in the F&O segment over the coming quarters.

2. Foreign Capital Flight: The ₹36,000 Crore Question

January 2026 witnessed the most severe Foreign Portfolio Investor (FPI) outflow in five months, with net selling of ₹35,962 crore. This brings the cumulative FII selling in CY2025 to a staggering ₹1,66,286 crore.

Root Causes of the Exodus

1. Earnings Weakness: Q3 FY26 corporate earnings have broadly disappointed, failing to justify premium valuations.
2. Rupee Depreciation: The Indian rupee has weakened to the 91-92 range against the US dollar, approaching historic lows.
3. Global Realignment: While India-focused funds see outflows, broader emerging market (EM) funds are seeing inflows, suggesting tactical rebalancing by global managers.

Liberalizing Overseas Investment

To counter this, the government has doubled the individual investment cap for Persons Resident Outside India (PROIs) and NRIs from 5% to 10% of a company's paid-up capital. The aggregate limit for such investors has been raised to 24%, aiming to tap into billions of dollars of diaspora capital.

3. Biopharma Shakti: India's Bid for Biologics Dominance

A standout initiative is Biopharma Shakti, a five-year, ₹10,000 crore program designed to transition India from a "pharmacy for generics" to a global hub for high-value biologics and biosimilars.

Key Components of the Program:

• Infrastructure: Establishing 3 new NIPERs and upgrading 7 existing institutes.
• Clinical Trials: Creating 1,000+ accredited sites to accelerate drug development.
• Innovation: A focus on "Discover in India," supporting manufacturing for complex therapies in cancer and diabetes.

Pharmaceutical stocks like Biocon Ltd (up 3%) and Piramal Pharma (up 1.3%) rallied as the market recognized the shift toward high-margin specialty medicine.

4. Semiconductor Revolution: ISM 2.0

Budget 2026 unveiled India Semiconductor Mission (ISM) 2.0 with a total outlay of ₹40,000 crore under the Electronics Components Manufacturing Scheme. With ₹1,000 crore allocated specifically for FY27, the focus is on building a full-stack ecosystem.

Strategic Priorities:

• Equipment Manufacturing: Incentivizing domestic production of tools currently dominated by firms like ASML and Applied Materials.
• IP Development: Designing Indian intellectual property for global chip applications.
• Milestones: 10 projects from ISM 1.0 are under construction, with 4 projects expected to begin production in 2026.

5. Data Center Tax Bonanza: A 22-Year Holiday

In an audacious move to capture the AI infrastructure race, the government announced a tax holiday until 2047 for foreign companies providing global cloud services through Indian data centers.

Policy Highlights:

• Exemption: 100% corporate tax exemption on global profits for eligible entities.
• Safe Harbor: A 15% safe harbor margin on costs for related-party transactions.
• Primary Beneficiaries: Hyperscalers like AWS, Azure, and Google Cloud, alongside Indian implementation partners like TCS, Infosys, and HCL Tech.

6. Infrastructure Mega-Push: ₹12.2 Lakh Crore Capex

Public capital expenditure has been raised by 9% to a record ₹12.2 lakh crore for FY27, approximately 3.5% of GDP.

Sectoral Allocations and Projects:

Infrastructure giants like L&T, BEL, and railway stocks like IRFC and RVNL remain key beneficiaries of this multi-year spending cycle.

7. Green Energy Transition: 30% Surge in Allocation

The renewable energy sector allocation surged by 30% to ₹32,914.7 crore, reflecting the urgency of India's net-zero 2070 commitment.

Budgetary Breakdown for Clean Energy:

Additionally, 35 capital goods for EV battery manufacturing have been added to the duty-exempt list, providing a massive boost to companies like Tata Motors, M&M, and battery makers like Exide and Amara Raja.

Key Takeaways for Retail Investors

• Derivative Costs: STT on futures has risen 150%, making high-frequency trading significantly more expensive.
• Wealth Erosion: Approximately ₹6 lakh crore in market cap was lost in the Budget day session.
• FPI Sentiment: Net selling of ₹35,962 crore in January 2026 suggests caution is required in the near term.
• Capex Consistency: The ₹12.2 lakh crore infrastructure outlay provides a long-term cushion for industrial stocks.
• New Sectors: Keep a close watch on Semiconductors (ISM 2.0) and Biologics (Biopharma Shakti) as new growth engines.

What This Means for Investors

Data suggests that while the STT hike is a painful short-term adjustment for the brokerage sector and derivative traders, it is a policy-induced repricing intended to shift capital toward long-term equity. Investors may consider monitoring the RBI MPC meeting (Feb 4-6, 2026) for interest rate cues, as any hawkish surprise could further pressure banking stocks.

Historical trends indicate that Budget-induced volatility often normalizes within 3-6 months. Retail investors may consider a staggered entry into sectors aligned with national priorities—specifically infrastructure, pharmaceuticals, and renewable energy. However, the India VIX at 15.66 signals that the market is currently in a high-anxiety phase; hence, capital preservation and reducing leverage are prudent strategies.