Stock Market Crashed On February 1: Sensex Down 2,371 Pts, Nifty Fell 749 Pts; Why Rs 7 Lakh Cr Wealth Eroded?

The Indian stock market crashed significantly after the Union Budget 2026 announcement. As Finance Minister Nirmala Sitharaman presented her ninth Budget speech, she said India must be integrated with global markets. For sustained economic growth, she said India must export more and attract stability and long-term capital needs. However, Sensex and Nifty, which witnessed few minutes of healthy buying, crashed as the budget speech was nearing its end.

Run over by bears, Sensex erased the 81,000 mark, and Nifty slipped below 24,600 levels. Nearly Rs 7 lakh crore of investors' wealth was wiped out.

One of the key reasons why Indian stocks crashed is the increase in Securities Transaction Tax (STT), which is expected to impact flows in the commodity market in the near term.

"The Union Budget FY27 kept markets on edge as the fiscal deficit target was pegged at 4.3%, while STT on futures was raised to 0.05% and on options to 0.15%, a move that is likely to dent participation in F&O and reduce speculative volumes in commodities as well," said Jateen Trivedi, VP Research Analyst - Commodity and Currency, LKP Securities.

Sensex, Nifty:

At 12:31 pm, Sensex crashed by a mind-boggling 2,370.36 points to hit an intraday low of 79,899.42. At the same time, Nifty nosedived by 748.9 points to hit an intraday low of 24,571.75. This led to BSE-listed companies market to Rs 453.43 lakh crore, which is down by Rs 6.6 lakh crore compared to previous session's market capitalisation of Rs 460.02 lakh crore.

All broader traded in red. Bank Nifty dropped to hit the day's low of 57,783.20. Nifty Financial Services plunged by nearly 1.5%.

India's volatility index surged by nearly 6%. Nifty Midcap and Smallcap indexes are down by 1.2% to 2%.

Except for IT and consumer durable stocks, all other indices traded in deep red. the worst to take the hit is PSU bank and metal indexes which fell by over 3.1% each. Nifty Oil & Gas index also dropped nearly 2%, FMCG dipped nearly 1.6% and chemical index plunged by 1.5%.

On Sensex, stocks like Titan, TCS, Sun Pharma, Infosys and M&M are top gainers. While BEL, SBI, Adani Ports, ITC, Bajaj Finance, Asian Paint, Tata Steel emerged as top losers.

Currently, both benchmarks have recovered some heavy losses in the second half of the trading session. Sensex is trading at 81,485.26, down by nearly 789.48 points or 1%. Following the similar trend, Nifty plunged by 282.35 points or 1.12% to trade at 25,038.40.

Why Is STT Hike Impacting Market?

As per Aakash Shah, Technical Research Analyst at Choice Equity Broking, the increase in Securities Transaction Tax (STT), especially in futures and options, is likely to act as a marginal negative for foreign portfolio investor (FPI) flows in the near term, particularly for high-frequency and derivative-focused global funds. As per post-Budget updates, STT on futures has been raised from 0.02% to 0.05%, and on options premium from 0.10% to 0.15%, which meaningfully increases transaction costs for active strategies.

Notably, recent data already shows that FPIs have been cautious - with equity outflows of over Rs 41,000 crore in January 2026 alone, reflecting global risk-off sentiment, elevated US bond yields, and currency pressures.

In this context, a higher STT further reduces post-tax returns, making India relatively less competitive for short-term and derivative-oriented foreign flows.

However, Shah also said that for long-only, fundamentally driven FPIs, the STT hike is unlikely to be a deal-breaker. Their investment decisions are more influenced by earnings visibility, currency stability, and policy predictability. That said, at the margin, higher transaction costs could tilt some global allocators towards other Asian markets, especially at a time when India is already facing pressure from AI-led capital shifts to the US, Taiwan and Korea.

Overall, Shah added, "while the STT hike may help boost tax collections, it risks dampening trading volumes and could slow tactical FPI participation. To meaningfully revive sustained FPI inflows, investors will be looking more closely at macro stability, rupee movement, and consistency in tax policy rather than just growth optics."

In January 2026, FIIs sold up to Rs 41,435.22 crore in Indian equities, higher from their selloffs of Rs 34,349.62 crore in December 2025. Notably, DIIs buying trend has slowed in January as well, with net inflow of Rs 69,220.74 crore, lower from inflow of Rs 79,619.91 crore in December 2025.

Stock Market Outlook:

According to Jashan Arora, Director at Master Trust Group, markets are likely to remain volatile and largely range-bound in the near term as higher transaction costs weigh on investor sentiment, particularly in the derivatives segment. The increase in STT and F&O-related costs could dampen trading volumes, putting near-term pressure on brokerages and exchanges that are heavily dependent on market activity. This may also lead to more cautious participation from retail traders, adding to short-term uncertainty.

But the broader macro picture remains supportive. Arora said, the Budget strikes a careful balance between growth and fiscal discipline, reinforcing the government's commitment to capital expenditure without compromising on consolidation. This is constructive for the medium-term outlook, especially for banks and infrastructure companies.