Nithin Kamath warns STT hike may not curb F&O speculation, instead hits trading volumes

India’s latest increase in securities transaction tax (STT) on equity derivatives has sparked criticism from Nithin Kamath, who argues that the move is unlikely to curb speculation in futures and options (F&O) and could instead deepen structural problems in the market.

In a post on social media platform X, Kamath said he does not fully understand the government’s reasoning behind the STT hike. However, if the intent was to rein in speculative trading, he believes the policy is flawed. According to him, the tax increase disproportionately affects futures trading, while speculative activity in India is overwhelmingly concentrated in options.

Kamath pointed out that nearly 95% of F&O trading volumes are now in options. Since the STT burden has risen more sharply on futures than on options, the change could ironically push even more traders toward options, which are inherently more speculative. In his view, this defeats the very purpose of trying to cool down risk-taking behaviour in the derivatives market.

He also warned that repeated increases in transaction taxes create long-term uncertainty for both brokers and traders. While a single hike may not immediately collapse volumes, steady increases over time can make trading economically unviable, especially for futures contracts. Kamath said this impact is already becoming visible, with futures volumes showing signs of stress as costs rise faster than potential returns.

Instead of relying on incremental tax hikes, Kamath suggested a more direct and structural solution: introducing clear product suitability norms. This would mean defining who can trade complex derivatives based on experience, risk appetite or financial capacity. While he acknowledged that such an approach would be unpopular, he argued it would bring clarity and reduce systemic risk far more effectively than higher taxes.

According to Kamath, suitability norms would also remove a major source of uncertainty for brokers, who currently operate in an environment where rules and costs can change frequently. In contrast, repeated STT hikes amount to what he described as a “death by a thousand cuts,” slowly eroding market participation without addressing the core issue.
The broader concern raised by Kamath is that higher transaction costs may eventually hurt market liquidity and price discovery. As trading becomes less viable, especially for hedgers and institutional participants, overall volumes could shrink, impacting not just derivatives but also the cash market that depends on F&O for depth and efficiency.

Kamath’s comments come at a time when policymakers are trying to strike a balance between curbing excessive speculation and preserving India’s position as one of the world’s most active derivatives markets.