Capital market stocks staged a recovery on February 2 after witnessing a steep fall immediately following the Union Budget announcement that raised the Securities Transaction Tax on derivatives trades.

During her Budget speech, Finance Minister Nirmala Sitharaman increased the STT on futures to 0.05 percent from 0.02 percent. The move caught traders off guard as market participants had anticipated relief rather than a rise in transaction costs. The immediate reaction was sharp: exchange and brokerage stocks corrected heavily as investors feared a meaningful drop in derivatives volumes, a key revenue driver for many listed capital market intermediaries.

The Nifty Capital Markets index, which had plunged nearly 6 percent in the previous session, rebounded over 1 percent in early trade. Shares of BSE rose nearly 4 percent, while Angel One, Nuvama and Motilal Oswal Financial Services gained around 2 percent each. HDFC AMC and CAMS saw modest gains of about 1 percent. However, not all stocks participated in the rebound, with CDSL, IEX, MCX and a few others trading in the red.

The sharp volatility highlights how sensitive capital market stocks are to regulatory and tax changes that affect trading activity, particularly in the futures and options segment.

The STT change implies that for every Rs 1 lakh worth of futures sold, traders will now pay Rs 20 in STT instead of Rs 12.50 earlier. For a Rs 10,000 options contract sale, STT has increased to Rs 10 from Rs 6.25. These incremental costs, while small at an individual trade level, become meaningful for high-frequency and large-volume traders who drive liquidity in the derivatives market.

Brokerage assessments, however, helped calm the panic.

Jefferies termed the move as largely manageable, describing it as a sentiment negative rather than a structural change. Based on its industry checks, the brokerage estimates around a 5 percent impact on trading volumes. This could translate into roughly a 4 percent earnings impact for companies such as BSE and Groww, which have higher exposure to derivatives activity.

Citi echoed a similar view, stating that the STT hike will likely act as a near-term sentiment overhang and could lead to a marginal decline in F&O volumes. However, it does not expect a significant long-term behavioural shift among traders. The brokerage noted that past increases in STT had only a muted impact on options turnover.

Citi added that brokers with a high mix of F&O revenue, such as Angel One and Groww, may face mild topline pressure, while diversified players such as Nuvama could see minimal impact.

This reassessment by brokerages appears to have triggered the rebound in stock prices, as investors recalibrated expectations from a worst-case scenario of sharp volume contraction to a more moderate impact.

From a business standpoint, the episode underlines how dependent exchanges and retail brokerages have become on derivatives trading volumes. The F&O segment contributes a significant share of transaction revenues for exchanges like BSE and is central to the business model of discount brokers and online trading platforms.

However, the experience of previous STT revisions suggests that trading activity tends to adapt rather than collapse. Traders often absorb higher costs if volatility and speculative opportunities remain attractive.