India's Small Stocks See Worst-Ever Yearly Start As Outlook Turns Gloomy

The rally seen in India's small-cap stocks in 2024 was such that it prompted intervention from the markets regulator, as concerns grew over frothy valuations. These stocks now are hit with bearish sentiment with macro woes ahead.

The small-cap benchmark—NSE Small Cap 250—has tumbled over 6.40% in the first nine sessions in 2025, the highest in any year. The previous low of 6.14% in the first nine sessions was recorded in 2011. Its mid-cap counterparts saw the worst start to a year since 2011.

The plunge in these stocks comes after the small-cap index rose 25.6% in 2024, against 48% in the previous year. The midcap gauge advanced by 23.1% in 2024, against a 44% rally in the year before.

The woes for the broader market worsened with the Nifty 500 stocks seeing the least number of shares since March 2023, trading above the 200-day moving average, according to Bloomberg. The stocks have been on a dull ride amid volatility in the first half of the year, due to geopolitical events, as analysts have warned.

A slowdown in India's economic growth, the new US administration under Donald Trump, rate cut bets, and declining current add to the woes that these stocks face along with its blue-chip peers. Emerging market equities entered a correction after declining by more than 10% from a high in October.

These events will keep the Indian equity market volatile, and it could respond in either direction based on the developments, Axis Securities said earlier. "However, we expect the first half of 2025 to be more volatile."

Above all, the third quarter earnings might be the icing on the cake for the bear market. The pace of earnings estimates downgrades for MSCI India components is at its fastest since mid-2022, according to data by Bloomberg Intelligence.

India's top stocks also succumbed to growing concerns of micro and macro uncertainties. The benchmark Nifty 50 saw its worst start to a year since 2016, with a fall of 4.83% in the first nine sessions.

Tata Group's Trent Ltd. and Tata Steel Ltd. were among the top stocks to fall the most along with Bharat Electronics Ltd., HDFC Bank Ltd. and NTPC Ltd.

Global funds have already taken steps to shift allocation to safe and less expensive assets. So far in January, foreign institutions have been net sellers of $2.58 billion worth of Indian equities. While being net buyers in primary market, FIIs have already sold secondary stocks worth $2.5 billion.

Midcap stocks are expected to continue their outperformance against larger peers over fiscal 2024-2026, according to a note by Jefferies, which advised investors to stay selective.

NSE Midcap 100's earnings per share is estimated to post over 20% compounded annual growth rate in FY24-26e, as against 12% for Nifty 50, the brokerage said. In 2025, "we suggest staying selective and are bullish on India EMS, capex recovery in CY25, and housing themes".

Kotak Securities expects mid-caps, small-caps, and ‘narrative’ stocks to see further severe correction. It expects large-cap stocks to hold up better in next few months. "The recent sharp corrections in Indian markets does not change the cautious outlook."