In a recent investor interaction, the management of National Stock Exchange of India acknowledged growing market discomfort following the Union Budget’s decision to increase securities transaction tax (STT) on both futures and options. The exchange said there had been widespread expectations within the market that STT, especially in the cash segment, might be rationalised or reduced. Instead, the tax burden has increased for derivatives, adding to overall transaction costs.

According to the exchange, the hike is being viewed unfavourably, particularly for index futures and single stock futures. Unlike options, which are widely used by traders for short-term strategies, futures contracts are typically utilised by long-term investors and institutions as hedging instruments. The higher STT, therefore, affects participants who use futures as a risk management tool rather than for speculative activity.

NSE management noted that multiple representations have been made to the government seeking reconsideration of the move. While the exchange remains hopeful that a review may be undertaken, it also clarified that the eventual policy decision lies with the authorities. Historically, periodic increases in STT have not led to sustained declines in derivatives volumes, as markets have tended to absorb higher transaction costs over time. However, the exchange admitted that the exact impact this time is difficult to quantify.

The concern is not merely theoretical. Broker associations argue that transaction costs in futures trading have risen sharply relative to options, creating an imbalance in how different derivative instruments are taxed. Association of National Exchanges Members of India (ANMI) has formally urged the government to review the hike, stating that overall costs in futures trading have nearly doubled, while options have seen only a marginal increase. According to ANMI, this could have implications for market liquidity, participation, and effective risk management, especially when Indian markets are already considered costlier compared to several global peers.

Parallel to the STT discussion is another regulatory proposal that has drawn attention — the possible withdrawal of calendar spread margin relief. NSE indicated that discussions are ongoing between broker associations and regulators on this matter. Industry participants have pointed out that retail participation in single stock futures and options has already declined over the past year, following a series of regulatory measures aimed at curbing excessive speculation and protecting small investors. The final decision on margin norms, however, will rest with the regulator, with investor protection as the central consideration.

To counterbalance potential pressure on derivatives liquidity, NSE highlighted reforms in the securities lending and borrowing (SLB) framework as an important area of focus. The Securities and Exchange Board of India (SEBI) has constituted a working group to review the existing SLB mechanism. Any easing of norms in this segment could deepen liquidity in the cash market and improve overall market depth, offering participants alternative ways to hedge and manage positions.

The broader issue that emerges from NSE’s comments is the delicate balance between regulatory oversight, tax policy, and market efficiency. India’s derivatives market is among the most active globally in terms of contract volumes, but concerns about excessive retail speculation in options have driven several regulatory interventions over the past year. The STT hike, however, appears to have unintentionally affected futures — a segment more aligned with institutional hedging.

For institutional investors, mutual funds, and large portfolio managers, futures are a cost-efficient method to hedge cash market exposure. Higher transaction taxes reduce the efficiency of this mechanism, potentially increasing the cost of managing portfolio risk. If hedging becomes more expensive, participants may either reduce hedging activity or shift to less efficient alternatives.

For brokers and exchanges, derivatives volumes are a key driver of revenues. Any sustained impact on futures trading could affect turnover dynamics, even if overall derivatives activity remains strong due to options trading.

In the near term, markets may not witness an immediate fall in derivatives volumes, as past trends suggest resilience to cost increases. However, over time, cost-sensitive institutional players may reassess trading strategies. This could lead to structural shifts in how derivatives are used, with a potential tilt further toward options at the expense of futures.

The impact is concentrated within the capital markets ecosystem — exchanges, brokers, proprietary trading desks, and institutional investors. Segments reliant on derivatives for hedging, such as arbitrage funds and portfolio managers, may face higher operational costs.