After their worst month in some time, small and mid-sized Indian stocks have bounced sharply this week. The recovery is real, but the factors that caused the October fall have not gone away.
The Nifty Smallcap 100 has risen about 4% in two sessions, gaining 1.4% on Monday and 2.7% on Tuesday. The Nifty Midcap 100 has risen more than 2% over the same period. The large-company indices have been almost flat.
The rebound follows a steep decline. Up to last Friday, the BSE Smallcap index had fallen nearly 9% in October and the BSE Midcap about 6%. On some days the Nifty Smallcap 100 dropped close to 3% in a single session. At its low last week, the smallcap index fell below its 200-day moving average, a level many traders use to judge the longer-term trend.
Why smaller stocks are bouncing
Three things explain the rebound.
Oil has eased slightly. Reports of Qatari mediation with Iran, with US support, pushed Brent below last week’s highs. Smaller companies tend to be more exposed to fuel and borrowing costs and have less ability to pass on higher costs, so they react most strongly when oil moves.
Prices had fallen far enough to attract buyers. After a 9% monthly fall, some investors saw value. Small and mid-sized stocks still trade at higher valuations than large companies, but the gap has narrowed this month.
Domestic money is still coming in. Monthly SIP contributions reached a record ₹32,500 crore in September, and domestic funds have kept buying even as foreign investors sold ₹48,000 crore of Indian shares this month. Much of that money goes to small and mid-cap funds, which have to put new inflows to work.
Why it may not last
The causes of October’s fall are still in place.
Oil is still very high. Even after the recent easing, Brent is near $115 a barrel, its highest level since 2022. Mediation has not changed the basic situation: Hormuz traffic is still heavily disrupted, the Houthis continue to attack Saudi oil infrastructure, and the US has not ruled out further strikes, possibly after the 3 November midterm elections.
Earnings are uneven. This results season has shown clear differences. Companies with strong positions, such as Bajaj Auto, ITC Hotels and Mankind Pharma, have done well. Businesses that use a lot of energy have struggled: four cement makers, including Shree Cement, Dalmia Bharat and ACC, reported sharp profit declines because of fuel costs. Smaller companies often have less pricing power than larger ones.
Interest rates are rising. The RBI raised rates this month for the first time in nearly four years and signalled more increases if inflation stays near 6%. Higher borrowing costs hurt smaller companies more, because they rely more on bank loans and have less access to cheaper funding.
Investors are being selective. The IPO market shows how cautious investors have become. Jio was subscribed 22 times, while EAAA’s offer drew only 0.05 times subscription on its first day. Last week, small issues in priority sectors listed at large premiums while bigger offers for sale struggled.
Two upcoming tests
The next week will show which way the market goes. Tomorrow’s Fed decision and Jio’s listing will set the tone for overall risk appetite. After that, the main factor for smaller stocks is oil, and in particular whether the mediation with Iran makes progress.
For now, the two-day rally looks more like a relief bounce after a sharp fall than a lasting turnaround. A sustained recovery in small and mid-sized stocks probably needs a real fall in oil prices.
About The Author
