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A months-long selloff in Indian stocks is showing few signs of abating, as a gauge of smallcap shares stretched its losses from a September peak to 20% before dip-buying helped it pare some decline.
The NSE Nifty Smallcap 250 Index narrowly missed entering a bear market as it slumped as much as 3.9% on Tuesday before closing 1.8% lower. The gauge had dropped 3.7% the previous day. The NSE India Volatility Index, also known as the fear gauge, rose to the highest level since August 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 amid high valuations.
Overseas investors have withdrawn more than $19 billion from the market on a net basis since the end of September, with over $7 billion of outflows happening in January alone.
“There is panic like situation among retail investors,” said Vikas Gupta, chief investment strategist at Mumbai-based OmniScience Capital. Individual investors typically invest in shares of small-sized firms that have delivered stellar returns in recent years and concerns over their valuations and growth outlook are catching up, he said.
The smallcap gauge jumped more than 26% in 2024 following a 48% surge in the previous year. The index has slumped more than 14% in January and is on course for its biggest monthly fall since March 2020. It is now trading 22 times its 12-month forward earnings, down from a peak of 26 in December.
“We are deploying cash in our portfolio” after selling some holdings in final months of last year, said Abhay Agarwal, a fund manager with Piper Serica Advisors Pvt. Some of the companies in small- and mid-cap space have dropped more than 20% despite reporting good earnings, making them attractive, he added.
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.
