Not a pretty Monday to start March with for the Midcaps and the smallcaps as the key indices continue to be under severe selling pressure. In fact, the BSE Smallcap Index is down over 1300 points while the BSE Midcap slumped close to 800 points within the first three hours of trade. This is after the the sharp 2% plus fall on Friday, February 28. The BSE Smallcap is down 14% in past 1 month and declined almost 25% so far in 2025. The BSE Midcap Index is no different either. It is down 10% in last 1 month and slumped 18% in 2025 so far.
Valuation worries
The primary concern is about the valuation of small and midcaps. Over the last 1 month and as reported by Financial Express.com, we have multiple reports from Kotak, Nomura and many established market observers on the valuation worries across the mid and small caps. Most have predicted further correction in the section. Kotak Institutional Equities pointed out that the “valuations are still fair-to-full-to-frothy for most parts of the market.”
Market veteran Arun Kejriwal was categorical in pointing out hat though moving forward the large caps may see some select buying by FIIs, the same can’t be expected in midcaps, “If you find this segment (largecaps) moving, foreigners may be tempted to come back and start buying, not selling, because they now realize they don’t own much of it. This does not mean that mid-cap, small-cap will play a catch-on effect. There is a lot of pain left there.”
Redemption pressure
Most market observers explained that the redemption pressure is also weighing on sentiment in the mid and small cap space. Market veteran Deepak Jasani believes that, “the selling in the mid and small caps at the moment is more from Mutual Funds and PMS rather than the average retailer. The common man is unlikely to sell at these low prices and would rather hope for a bounceback to liquidate positions. I think the selling that we are seeing currently may be due to redemption pressure from Mutual Funds/PMS and also Fund Managers wanting to raise cash. The Nifty has not stabilised so far. Once the Nifty stabilises, we may see some buying in the broader markets as well.”
Earnings downgrade and investors seeking refuge in large caps
Akshay Chinchalkar, Head of Research, Axis Securities pointed out that smallcaps and midcaps continue to be pressured by many headwinds. Some of these include:
1. Earnings downgrades due to valuation excesses that are now coming under compression given the lack of earnings visibility
2.Rotation to large caps as investors seek relative refuge
3. Persistent weakness in the rupee due to foreign outflows that’s creating challenges for the RBI to cut rates further
4.Tariff related uncertainties
FII outflows continue to worry investors
The FII selling spree continues to weigh on the markets. February 28 registered the biggest single-day outflow at Rs 11,639.02 crore. The total outflows for 2025 now exceed Rs 1.5 lakh crore. Pawan Parakh, Fund Manager, Geojit Financial Services explained the connect and said, “Its a normal market trend that SMIDs (small and midcaps) fall more than largecaps in a downward market. This time is no different. However, now the market fall has extended onto its 6th month, which has led to a substantial decline in market volumes. While the FII selling is persisting, volumes on the buy side have dried which is leading to sharp corrections on low volumes.”
Apart from these key factors, Chinchalkar added that, “Higher yields in global debt markets along with the allure of American assets due to President Trump’s policies and the rebound in Chinese markets triggered by the DeepSeek saga,” also added to the selling pressure in mid and small caps.”