India's smallcap index plunges 20% from September high

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A monthslong selloff in Indian stocks is showing few signs of abating, with a gauge of smallcap shares plunging on Tuesday to take its losses from a September peak to 20%.

The NSE Nifty Smallcap 250 Index was on course to enter a bear market after losing more than 3% early in Tuesday’s session. It sank 3.7% on Monday.

Indian stocks have suffered in recent months as concerns over a slowdown in economic as well as earnings growth have seen foreign funds exit the market. Small- and mid-cap stocks seem to be bearing the brunt of the latest slide as risk-off moves deepen. Overseas investors have withdrawn more than $19 billion from the market on a net basis since the end of September, with over $7 billion of outflows happening in January alone.

Bloomberg

“This small-cap selloff, caused due to high valuation expansion over the years, can extend the collateral damage for the broader market as well,” said Deven Choksey, managing director at DRChoksey FinServ Pvt. “Many people have taken unduly large exposure to small stocks. The high valuation leaves no scope for error.”India was a darling for global equity investors until just a few months ago, threatening even to topple China in emerging-market indexes, as a pandemic-era consumption boom and the government’s strong focus on infrastructure creation boosted the market as well as corporate profits. However, an ensuing demand slowdown amid high inflation and interest rates has weighed on the economy, with growth seen sliding to a four-year low.

With corporate earnings starting to falter, investors have questioned if Indian stocks are worthy of the valuation premium they command over emerging-market peers.

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