Capex push, STT hike and budget squeeze for the stock market: Will Sensex and Nifty fall further in the coming days?

Indian stock markets witnessed sharp volatility after the Union Budget 2026, with the Sensex falling over 1,200 points mid-session after falling nearly 2,000 points at worst. The sharp decline reflected investors’ disappointment over higher trade taxes and the lack of major triggers that could bring foreign investors back into the market, even as the budget sent strong signals on capital spending and long-term growth.

Why the markets reacted so sharply

The sharp sell-off was mainly caused by unexpected tax measures and not by what the budget did not deliver. The government increased taxes on securities transactions on futures and options, increasing costs for derivatives traders at a time when market sentiment was already fragile.Samir Arora of Helios Capital told CNBC-TV18 that markets could see more downside. He said the problem was not that expectations were not met, but that something negative came in that investors were not prepared for. He said the STT increase was a clear shock to the market and could have lasting effects on sentiment.

Somil Mehta, Head of Retail Research at Mirae Asset Sharekhan, said investors had hoped for capital gains tax relief in the long and short term, especially to support foreign portfolio investors. Instead, the government has increased the STT for futures and options, raising trading costs and damaging short-term confidence. He said a higher STT is generally negative for liquidity and could weigh on markets in the short term.

The brokerage and capital markets segments were among the hardest hit as higher transaction costs are expected to squeeze margins and dampen trading volumes. Analysts warned that volatility alone may not translate into higher activity if costs continue to rise.

ArunaGiri, CEO of TrustLine Holdings, said today’s market reaction appears to be largely a knee-jerk reaction, focusing on STT changes rather than long-term fundamentals.

FPIs are still missing from the market

A key overhang for Indian equities remains the absence of foreign portfolio investors. FPIs have already sold more than $23 billion worth of Indian equities in the past year, and analysts say the Budget has done little to change that narrative.

There were no major announcements on capital gains tax relief or other direct incentives that could improve after-tax returns for foreign investors. While the Budget proposed allowing people outside India to invest more freely in listed companies by raising individual and blanket limits, analysts said this is unlikely to offset the impact of higher transaction taxes in the short term.

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, especially in derivatives. He added that this could also lead to more cautious participation from retailers, adding to near-term uncertainty.

Capex is the big positive

While the short-term reaction was negative, analysts agree that the biggest positive from the budget lies in the strong pressure on capital expenditure. The government has increased capital expenditure for FY27 to Rs 12.2 lakh crore from around Rs 10 lakh crore in FY26, a marked double-digit increase.

This capital investment-based approach is expected to support the infrastructure, construction, capital goods, steel, cement and banking sectors in the medium to long term. The budget also proposed increased spending on rail corridors, urban development, manufacturing, semiconductors and clean energy.

Defense spending was another major positive. Defense investments have increased by around 18% to Rs 2.19 lakh crore, strengthening the government’s focus on strategic preparedness and domestic manufacturing.

Ajit Mishra, SVP at Religare Broking, said the Budget reflects continuity with conviction and balances growth and fiscal discipline amid global uncertainty. He noted that the continued focus on infrastructure, manufacturing, defense and energy security strengthens India’s medium-term growth engine and improves earnings visibility for companies linked to government spending.

Other positives hidden in fine print

In addition to the overall investment figures, the budget also included a number of sector-specific positives that markets are still digesting. The government has announced a tax exemption until 2047 for foreign companies providing global cloud services using India-based data centers, which could support investments in digital infrastructure.

There was also a boost to manufacturing in seven strategic sectors, higher allocations for semiconductors, biopharmaceuticals and clean energy, and continued support for small and medium-sized businesses and the modernization of logistics. Players in the textile, electronics and renewable energy sectors can also benefit from targeted schemes such as mega parks and tax exemptions.

Feroze Azeez, co-CEO of Anand Rathi Wealth, said while the STT hike could lead to short-term volatility and lower derivatives volumes, the broader policy framework remains supportive for long-term investors who focus more on fundamentals than trading activities.

Will the markets fall further?

In the short term, analysts expect volatility to remain high. Higher transaction taxes, weak FPI flows, a weakening rupee and global uncertainties are likely to keep sentiment cautious. However, many analysts also believe that the absence of further negative surprises could itself become a stabilizing factor.

The budget avoided aggressive fiscal tightening, maintained growth momentum and strengthened capital investment-led development. Jashan Arora said investors may increasingly look for selective opportunities in banking and infrastructure rather than risky, transaction-driven segments.

“Markets will remain sensitive to continued FPI outflows, further possible INR declines and their combined impact on equities, especially 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,” said Amar K Ambani, Executive Director, YES Securities.

(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of Economic Times)