The futures segment faces the steepest adjustment. STT will rise to 0.05% of notional turnover from 0.02%, a levy applied to the full contract value rather than just premiums paid.
“In the futures segment, STT has increased by 150% which is a massive hike,” said Ashish Nanda of Kotak Securities. “Additionally, in Futures segment STT is levied on notional contract value. Therefore, volumes in the futures market are likely to take a hit as a lot of traders could move the future volumes to synthetic futures.”
That migration to synthetic futures, constructed through options strategies, reflects emerging arbitrage between the two tax regimes. “Institutions/HNI’s who use futures for hedging purposes may use the options route to create synthetic futures which will be cheaper than trading in futures after the STT hike,” Nanda said.
Options markets appear more resilient to the tax shock. STT rises to 0.15% of premium turnover from 0.1%, a 50% increase but one applied only to premiums rather than notional values. “In options, however, the hike is a bit calibrated at 50%,” Nanda observed. “There could be some near term drop in volumes in options too but I believe volumes will come back as the impact is not as material as in futures.”
Shrey Jain, CEO of Stocko by InCred Money, characterized the timing as unexpected. “The increase in STT announced in the budget and becoming effective from April 1 did come as a surprise to some market participants,” he said. “Hike will impact retail and high-frequency traders as their transaction cost will go up substantially.”
Yet Jain suggested the impact may prove selective rather than systemic: “Transaction cost changes may influence certain trading strategies at the margin; the broader participation trend remains intact.”Some market participants view the regulatory tightening through a longer lens, believing past STT increases failed to materially dent trading volumes and may even channel capital toward longer-term investing and mutual fund participation.
The Reserve Bank of India’s new bank guarantee rules requiring 100% collateral for proprietary trading, up from 50%, was also scheduled to come into effect from tomorrow but the banking regulator postponed the implementation to July 1.