ETMarkets Smart Talk | STT hike weighs on sentiment, but growth-focused Budget supports markets: Naveen Kulkarni

Markets saw a sharp knee-jerk reaction after the Budget despite a strong capex push, as higher securities transaction tax (STT) weighed on near-term sentiment. Naveen Kulkarni, CIO at Axis Securities PMS, believes the sell-off was largely sentiment-driven and exacerbated by thin trading volumes rather than a shift in underlying fundamentals.

In this ETMarkets Smart Talk, Kulkarni explains why the intrinsic value of equities remains intact, how FII behaviour around the STT hike could shape the near-term setup, and why a growth-focused Budget with higher capex and manageable fiscal numbers continues to support the medium- to long-term market outlook. Edited Excerpts –

Kshitij Anand: Let me also get your perspective on why markets fell sharply after the Budget despite strong capex numbers. We have seen a spike in capex to nearly one lakh crore, from ₹11.11 lakh crore earlier to now over ₹12 lakh crore. Is this reaction driven more by sentiment, or is there something else at play? What would be your take on this?
Naveen Kulkarni: Yes, clearly the reaction has been driven by sentiment. At one point, the market was down by probably around 2.5%, and then we have seen some pullback as well. If you look at the markets over the last few sessions, trading volumes have been a little thinner and not particularly exciting. When the sell-off happened, it did not occur on very large volumes; it happened on relatively thinner volumes. And when some degree of institutional buying comes in, seeing opportunity, we are also witnessing a pullback.What will be important is tomorrow, because I do not think there has been significant FII participation yet. How they read the market, especially the STT hike—which impacts them as well, given that many large trading hedge funds operate in India—and how they assess its impact on trading volumes will be key. We could see some more impact coming tomorrow. So, tomorrow and probably next week is when the market should set up. Clearly, we have been in an oversold market and have seen some additional selling, but I think we should be okay from here.

Kshitij Anand: Much of the money is also moving from bank FDs to the equity market, which is something the government has on its mind as it looks to manage liquidity in the banking system. Naveen, picking up from where you left off—given that today is a holiday—do you see the post-Budget sell-off as an overreaction to the STT hike, or as a genuine shift in market structure? The reason I ask is that we have seen substantial selling by FIIs as well. In 2025, more than ₹1.6 lakh crore was withdrawn, and so far in January, the figure is close to ₹40,000–50,000 crore. How do you see this playing out in the coming week?
Naveen Kulkarni: If you look at it, whether it is the securities transaction tax on futures or options, the intrinsic value of the underlying does not change. When you are buying in the cash market, you are holding it for the long term and for delivery, so the intrinsic value does not change because of these parameters. This reaction, whether you look at it from the perspective of FII participation or hedge fund activity, is likely to be short-lived because the intrinsic value of the underlying depends on growth in profitability and overall metrics, and that does not seem to be changing.
On the flip side, if I look at the Budget, there is definitely a focus on growth. Capex numbers are higher, and more importantly, the composition of capex also looks more interesting and growth-focused. Apart from that, a fiscal deficit of 4.3% is not prohibitive for growth. There have not been any significant cuts, and borrowing levels continue to look reasonable. If I look at the Budget numbers overall, they are not very aggressive. It is unlikely that the government will miss its budget expectations or estimates.Broadly speaking, the Budget is not a major negative factor. Yes, the STT hike is having an impact today and may continue to do so for a few more days, but overall, I do not see the underlying value changing. Underlying asset values are likely to rise over the next 12 months, and this phase could provide a good opportunity as the market clears excesses.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)