The markets are under-selling, mid and small-cap stocks saw a sharp sell-off in Friday’s trade. The Nifty Midcap 100 cracked 1,009 points or as much as 1.67% to trade at 59,585.40, intra-day. There are two big factors contributing to this mayhem.
“Though there are no immediate negative triggers in the small and midcap space, the broader reasons include continued FII selling, rupee’s weakness and upcoming year end considerations. This is impacting the small and midcaps and investors are staying currently with large cap names. This may have led to faster fall in prices in the small and midcap space due to inadequate buying interest,” said market veteran Deepak Jasani.
Here are 3 reasons why mid- and small-cap stocks are falling
1. Continuous FII Selling
The Foreign Institutional Investors (FIIs) are on a selling spree, dumping Indian equities for the five consecutive month. Even in December, they have remained net sellers. Out of the five trading sessions in December, FIIs were the net sellers in all of them, disposing of Rs 10,403.62 crore.
However, Domestic Institutional Investors (DIIs), on the other hand, bought with the same intensity to hold the markets at current levels.
2. Depreciation of Indian rupee
The Indian rupee was under pressure last week when it slumped past the 90 mark to the US dollar for the first time. The domestic currency has dipped 5% since January, becoming the worst performer in Asia. “Sustained depreciation of the rupee has been forcing FIIs to sell in the market continuously. Another major factor is the spike in Japanese bond yields, which can trigger another bout of reversal of the yen carry trade. In brief, there is potential for high volatility,” said VK Vijayakumar, Chief Investment Strategist at Geojit Investments.
However, the RBI has stepped in with a slew of measures, including a 25 bps rate cut, a Rs 1 lakh crore open-market bond purchase, and a $5 billion buy–sell swap to ease dollar tightness.
3. Defensive approach
Also, overall, the market is witnessing a defensive approach. Nifty Put-Call Ratio (PCR) rose by 0.08 over the week, driven by a decline in Call option open interest and an increase in Put option open interest, with puts seeing stronger additions than calls, indicating a defensive undertone in positioning, said Axis Securities in a report.