Will the STT hike actually be beneficial?
What's the story
Rajesh Baheti, Managing Director of Crosseas Capital Services, has criticized the recent increase in Securities Transaction Tax (STT) on futures and options. He believes that the move is mainly aimed at revenue generation rather than curbing speculation. Baheti warns that this could hurt market liquidity by affecting high-frequency traders and arbitrageurs who are key to keeping markets deep and efficient.
Liquidity concerns
Foreign investors at risk due to declining liquidity
Baheti said that high-frequency traders are the ones who provide liquidity to the market. He warned that a decline in liquidity could pose a serious threat to foreign investors. "If you think liquidity does not become a very important factor for FPI to decide which markets to put your money in, there's a little bit of a disconnect," he added.
Pressure
Government's continuous pressure on markets raises concerns
Baheti criticized the Indian government for continuously pushing the market to its limits. He compared it to "stretching the rubber band" and questioned if this was indeed the breaking point. He said while the derivatives market structure can adapt for some time, there could come a point where trading becomes unviable for certain participants due to these changes.
Market dynamics
Options trading could also be affected
Baheti highlighted that futures trading is a small part of the derivatives market compared to options. He warned that new cost structure could even make options trading unattractive for professional traders. This, he said, could have a serious impact on liquidity in the long run.
Market effects
Retail traders' behavior unlikely to change significantly
Baheti also dismissed the notion that the tax change would significantly affect retail traders' behavior. He explained that many retail traders usually buy the options and hold them for days or weeks, hoping to either double their money or take a complete loss. In such cases, a higher STT is unlikely to deter speculation but could widen spreads in the market, making it less attractive for foreign investors looking at where to deploy capital.
Policy critique
Government's signaling needs clarity
Baheti questioned the clarity of the government's signaling with this move. He argued that if the intention was to curb speculation while promoting long-term investing, a stronger message would have been to remove the additional STT on delivery-based equity trades simultaneously. This would have left no room for ambiguity about what kind of market behavior is actually being encouraged by these changes.
Taxation view
Increasing taxation on capital markets
Baheti also highlighted the broader trend of increasing taxation on capital markets in recent years. He said the Centre seems to be betting that strong economic growth of around 6-7% is enough to keep markets going without any additional incentives. While previous STT hikes haven't always resulted in a sharp fall in volumes, Baheti warned that repeated cost increases still pose cumulative risks for liquidity and market attractiveness for global investors.