Editorial

The Indian stock markets delivered a stark verdict on the Union Budget 2026-27 presented by Finance Minister Nirmala Sitharaman: a sharp sell-off, marking one of the worst Budget-day performances in recent years. Benchmark indices tumbled nearly 2% in a special Sunday trading session, with the BSE Sensex closing down about 1,547 points (1.88%) at 80,722.94 and the NSE Nifty 50 shedding 495 points (1.96%) to settle at 24,825.45. Intraday losses were even steeper, breaching 2.9% at points, erasing significant market capitalization and spiking volatility as measured by the India VIX surge of around 14%.

The primary trigger for this negative reaction was the unexpected hike in Securities Transaction Tax (STT) on derivatives trades. Futures STT doubled to 0.05% from 0.02%, while options premium tax rose to 0.15% from 0.1%. This move, intended to curb excessive speculation in the booming F&O segment and generate modest revenue, caught investors off guard. Brokerage and trading-related stocks bore the brunt, with shares of BSE Ltd, Angel One, and others plunging up to 13-18%. Heavyweights like Reliance Industries, State Bank of India, and ONGC also weighed in, amplifying broad-based selling across mid- and small-caps.

Compounding the disappointment was the absence of big-ticket tax relief that many had anticipated. No changes to income tax slabs, no meaningful capital gains tax reductions, and no broad-based consumption boosters materialized. Markets had priced in hopes of investor-friendly tweaks to spur foreign inflows and revive sentiment amid global headwinds, including US tariff threats and rupee pressures. Instead, the Budget prioritized fiscal discipline—projecting a fiscal deficit of 4.3% of GDP (down from 4.4%) and debt-to-GDP at 55.6%—signaling continuity over populism.

Yet, this knee-jerk reaction overlooks several constructive elements. Capital expenditure rose impressively to ₹12.2 lakh crore (up ~9% from the previous year), reinforcing the government’s long-standing infrastructure-led growth strategy. Defence allocation surged significantly (post-Operation Sindoor context), benefiting firms in manufacturing and modernization. Targeted incentives for semiconductors, biopharma (₹10,000 crore push), AI data centres, rare earths, textiles, and MSMEs (via a dedicated growth fund) align with self-reliance and export competitiveness goals. These measures promise long-term multipliers for capex-heavy sectors like construction, railways, and renewables, even if private investment revival remains a challenge.

In essence, the Budget reflects prudent housekeeping amid geopolitical uncertainties rather than a stimulus package. The immediate market pain stems from dashed short-term expectations around derivatives taxation and tax relief, but the structural focus on infra, defence, and manufacturing could underpin sustained recovery. Investors may view this dip as a buying opportunity in fundamentally strong sectors, provided global cues stabilize. The true test will unfold in coming quarters as execution on capex and policy reforms materializes.

The escalating tensions between the United States and Iran, as highlighted by Supreme Leader Ayatollah Ali Khamenei’s recent stark warning, underscore the fragile balance between deterrence, diplomacy, and the risk of catastrophic escalation in the Middle East. On February 1, 2026, Khamenei declared that any U.S. attack on Iran would ignite a “regional war,” accusing Washington of coveting Iran’s vast oil and natural gas resources in a bid to seize control, reminiscent of historical grievances. This rhetoric comes amid U.S. military buildup, including the deployment of the USS Abraham Lincoln carrier strike group to the Arabian Sea, prompted by Iran’s crackdown on nationwide protests and broader concerns over its nuclear ambitions and regional influence.

Khamenei’s statement is a classic blend of defiance and deterrence. By framing potential U.S. action as resource-driven aggression rather than legitimate security concerns—such as Iran’s nuclear program or support for proxy militias—he seeks to rally domestic support, portray Iran as a victim, and warn regional actors (including Gulf states hosting U.S. bases) of the spillover consequences. A conflict could disrupt the Strait of Hormuz, through which roughly one-fifth of global oil passes, sending energy prices soaring and drawing in allies like Israel, Saudi Arabia, and possibly others. Iran’s threats to target U.S. assets and its recent designation of European armies as “terrorist groups” further signal a strategy of asymmetric escalation to raise the costs for any aggressor.

Yet, amid the saber-rattling, a diplomatic opening persists. Iranian Foreign Minister Abbas Araghchi expressed openness to “fair and equitable” nuclear talks in recent interviews, emphasizing confidence in achieving a deal that ensures no nuclear weapons while lifting sanctions and respecting Iran’s right to peaceful enrichment. He acknowledged eroded trust due to past U.S. withdrawals from agreements but highlighted “fruitful” indirect mediation by regional partners like Qatar and Turkey. President Trump has reciprocated cautiously, expressing hope for a deal and suggesting Iran is “seriously talking,” while warning that failure could test Khamenei’s regional war prediction.

This duality—threats paired with negotiation signals—reflects calculated posturing on both sides. For Iran, facing economic strain from sanctions and domestic unrest, a new accord could provide relief without full capitulation. For the U.S., under Trump, a swift diplomatic win would avert a costly war, align with “America First” priorities, and pressure Iran on missiles and proxies. However, core mistrust remains: Washington demands verifiable curbs beyond the nuclear file, while Tehran insists talks cannot occur under military threat.

The path forward hinges on avoiding miscalculation. Regional mediators are pushing de-escalation, and both sides have incentives to talk rather than fight. A regional war would devastate economies, destabilize governments, and risk broader involvement—outcomes neither truly desires. Restraint, indirect channels, and realistic compromises on sanctions relief for verifiable nuclear limits offer the best chance to pull back from the brink. Failure to seize this moment could turn warnings into reality, with profound global repercussions.

• SAS Kirmani