STT hike unlikely to rattle long-term foreign investors, may curb speculative trading: Ashishkumar Chauhan

Synopsis

The government's increased Securities Transaction Tax on derivatives aims to curb speculation and encourage long-term investing. While high-frequency traders may need to adjust strategies, foreign portfolio investors are expected to remain unaffected, prioritizing company growth and economic stability over short-term trading costs.

The government’s decision to raise Securities Transaction Tax (STT) on derivatives is being seen as a clear signal to tilt market behaviour toward long-term investing and away from excessive speculation. However, market participants believe the move is unlikely to materially impact long-term foreign portfolio investors (FPIs), even as it may force high-frequency and algorithmic traders to reassess their strategies.

Responding to questions on whether the finance minister is nudging investors toward the cash market instead of futures and options (F&O), Ashishkumar Chauhan, MD & CEO, NSE said that most foreign investors are not driven by short-term trading costs.

“Broadly speaking, in some ways the FIIs do not trade every second. They are not the high-frequency players. I mean, there are specialised high-frequency players, but what we know as FPIs are usually not the ones who, once they buy, they stay in a stock for at least a year or five years,” Chauhan said in an interview to ET Now.

According to him, for long-term global investors, transaction taxes on derivatives are not a key decision driver. “That is why they do not see this STT on options or futures as something very important. What they look for is actually the companies and the economy’s ability to sustain growth and also increase their profits,” he added.

Chauhan said this is the primary reason he does not expect foreign portfolio investors to be unsettled by the recent changes. “That is why I do not see the foreign portfolio investors getting rattled because of some minor STT changes in the derivative side.”

Where the impact is likely to be felt more meaningfully is among high-frequency trading (HFT) and algorithmic players, many of whom operate with very thin margins and high turnover.

“Naturally, the HFT players, which are largely Indian setups, although they might be foreign owned, they will have to recalibrate their strategies,” Chauhan noted.

Market participants believe the higher STT could reduce excessive churn in the derivatives segment and encourage a healthier balance between speculative activity and long-term investing in the cash market. The move is also being interpreted as part of a broader policy effort to improve market quality and curb hyper-short-term trading, without disrupting long-term capital flows.

While near-term volumes in F&O may see some adjustment, experts say the long-term impact on India’s attractiveness for global investors is likely to be limited, with fundamentals, growth prospects, and corporate profitability continuing to remain the key drivers of foreign capital allocation.

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