Smids face rout, close in on bear territory as stream of bad news continues | Stock Market News

Indian investors saw about ₹9.3 lakh crore wiped out in market wealth on Tuesday as Trump’s latest tariffs, slower corporate earnings and a relentless selloff by foreign investors continued to rock the sentiment. Mid- and small-cap stocks took an even harder hit.

Benchmark indices fell for the fifth straight session, with Nifty 50 and S&P BSE-Sensex settling at a two-week low at 23,071.80 and 76293.60 points respectively, each down 1.3%. During the day, the headline indices fell as much as 2%.

Heavyweights Reliance Industries Ltd, HDFC Bank Ltd, Larsen & Toubro Ltd, and Tata Consultancy Services Ltd weighed down the benchmarks. Among NSE sectoral indices, the Nifty Midsmall Financial Services index took the biggest hit, sliding nearly 4%, while the Nifty Midsmall Healthcare index followed with a 3.3% drop.

Provisional data shows foreign institutional investors (FIIs) offloaded ₹4,486 crore in Indian equities, while domestic institutional investors (DIIs) stepped up with net purchases of ₹4,002 crore. While FIIs have net sold ₹98,393 crore worth of shares in the cash market year-to-date, DIIs more than offset that with a net purchase of ₹99,383 crore.

Trump’s trade war took centre stage as he signed orders imposing 25% tariffs on steel and aluminium imports from March 12, ignoring warnings from Europe and China. The European Union and Canada quickly vowed retaliation, sparking global investor concerns.

India, too, is reviewing import tariffs on over 30 items, including luxury cars and solar cells. With Prime Minister Narendra Modi set to visit the US on Wednesday and Thursday–just ahead of Trump’s expected tariff announcement–investors are hoping for a breakthrough that could ease tensions and restore confidence.

Trump tariffs are not a major concern directly for Indian markets but to an extent it is an emerging markets issue, and still does impact India, said Aashish Somaiyaa, chief executive officer at WhiteOak Capital AMC. “We will need to see through the next 60 days for clarity to emerge.”

Also, the US market, which is in late stage of AI-driven rally, needs to cool off for the US dollar to settle and emerging markets to get a breather, he said.

Although the RBI’s intervention offered a breather, pulling the rupee off Monday’s record low, the pressure hasn’t eased.

“The Indian equity market is dragged down by relentless FII selling driven by weakness in rupee and relatively expensive valuations among emerging markets,” said Gaurav Dua, head – capital market strategy, Mirae Asset Sharekhan.

Persistent foreign fund outflows, global risk aversion, and trade uncertainties will keep the currency on a tightrope, adding to market volatility in the near term, according to market experts. Despite the central bank’s efforts, sustained FII selling increases dollar demand, while global uncertainties, such as US trade policies and Federal Reserve’s interest rate decisions, further weigh on sentiment. Adding to the pressure is slowing growth at home, making a lasting recovery in rupee challenging, they said.

Also read | Record FII exodus shakes India’s stock markets even as domestic funds step up

“The market has already priced in all the positive developments, which explains the broad-based profit-booking (seen on Tuesday),” said Kranthi Bathini, director of equity strategy at WealthMills Securities.

Smids near bear territory 

The pain was felt the most in the small- and mid-cap segments on Tuesday, with the Nifty Smallcap 250 closing in on the bear territory after it tanked 3.42% to 15156.95–a two-week low. The total fall since 24 September record high of 18688.30 stands at 18.9%–a plunge of 20% or more from a high is called a bear market.

The Nifty Midcap 150 plunged 2.94% to 18,837, taking the total fall from 25 September, when the index hit a record high of 22515.4, to 16.33%. Both the broader indices have underperformed the Nifty, which has corrected 12.19% since the September highs.

“Moderation in earnings momentum and US-induced global tariff tensions have resulted in a sharper sell off in mid- and small-caps than large caps,” said Mahesh Patil, CIO, Aditya Birla Sun Life AMC. Patil expects the recent “fiscal and monetary stimuli” provided by the government and the RBI to support the pick-up in earnings growth in the second half of this year.” So, the pain in small and mids might last a bit longer, with chances of sharp bounces interspersed within the consolidation.”

Also read | The curious case of UAE-based funds in India’s small-cap bubble

As many as 137 (55%) out of 250 Smallcap stocks and 76 (51%) of 150 Midcap stocks (51%) traded below 20% from the indices’ September highs, per Analytics firm IndiaCharts. Against this, 20 Nifty stocks or 40% of the total 50 trade below 20% from the September high.

“This is a good time to accumulate quality large caps and, in certain cases, small and midcaps with positive cash flows and reasonable valuation,” says Patil.

However, even after the recent correction, the smids appears expensive. For instance, the index trades at 34.86 times its twelve-month trailing earnings against the three-year average of 32.82 times. The Smallcap 250 trades at 25.56 times its trailing earnings compared to its three-year average of 22.77 times, according to Bloomberg data.

“Despite a more than 16.5% correction from its recent highs, the Nifty Midcap index is still up by around 70% since March 2023 levels,” said Dhiraj Relli, managing director & chief executive officer at HDFC Securities.

Markets had factored sustained high earnings growth into stock prices, and the recent disappointment in quarterly results has warranted valuation de-ratings across many mid- and small-cap stocks, he said, citing that as the reason for the sharp correction in the broader market.

He also recommends that investors adopt a selective approach, focusing on large-caps. “These stocks, driven by comparatively higher earnings growth and more attractive valuations, will offer superior risk-adjusted returns compared to mid- and small-cap stocks.”

Also read | Markets are correcting. It’s time to consider contrarian investing.

Some traders and investors said that margin calls were triggered, amplifying the sell-off in Indian equities. Essentially, when investors trade with leverage—say investing ₹1 with 100% leverage to buy equities worth ₹2—a market drop of 20-30% significantly erodes their position. This forces brokers to hit stop-loss levels and aggressively square off holdings, intensifying the downward spiral, explained a trader.

Investor nervousness

To be sure, mutual fund inflows into mid- and small-caps have exceeded those into large caps. For instance, Fisdom Research shows that net inflows into mid-cap funds in the fiscal through December stood at ₹29,415 crore against net inflows of ₹28,138 crore into small-cap funds and ₹15,079 crore into large-cap funds. But net systematic investment plan opening reflects investor nervousness. In December, net SIPs (registration minus discontinuation) openings stood at 9.37 lakh against 18.89 lakh since FY23.

“Anecdotal evidence shows that retail investor flows are impacted when one-year returns turn negative,” said Gaurav Kulshreshtha, head of products and research, IIFL Capital. “We will have to closely watch how investor behaviour plays out.”

Also read | Nervous markets seek direction as Donald Trump’s actions threaten whipsaws

On a one-year basis, the Nifty Midcap 150 has given a return of 7.2%, while the Nifty Smallcap 250 has returned 3.9% to Tuesday closing levels.

What’s next?

With budget and Trump’s initial tariffs behind, all eyes will be on Federal Reserve Chair Jerome Powell’s commentary later on Tuesday as it could signal potential rate cuts in the coming months—a crucial factor for market direction, said said Bathini of WealthMills Securities.

Powell is headed to Capitol Hill for his twice-yearly testimony before Congress. Powell will appear before the Senate Committee on Banking, Housing, and Urban Affairs on Tuesday, and the House Financial Services Committee on Wednesday. US stock index futures slipped ahead of his testimony as it would provide insight on tariffs and their impact on inflation in the world’s biggest economy.