It’s a rather frightful Friday for the small and midcap stocks in the market today. The key Midcap and small cap Indices ae down over 2% extending the losses seen in the week thus far. This has decidedly been the worst week for the mid and small caps in over 15 months with a significant amount of investor wealth being wiped out.

The BSE Midcap Index is down nearly 1.6% below 42,750 while the BSE Smallcap Index is down over 2% around 50,100. The Nifty Midcap 100 Index is down 2% while the Nifty Smallcap 100 is down over 2.5%.

Market veteran Deepak Jasani attributes this sharp fall to, “continued selling pressure in the large caps is having a domino effect in the mid and small cap space. The FII sell-off is not abetting and the large caps as a result are seeing significant selling pressure. This is now impacting sentiment across the broader market too. Moreover midcap earnings are far from encouraging. Though this has been accounted for, it no doubt impacts sentiment.”

3 reasons why small caps and mid caps are falling

There are many factors that’s exerting pressure on market sentiment. However, the three key reasons why the stock markets are falling include-

FII selling continues

FII selling in Indian markets has been relentless over the past few months. Foreign institutional investors (FIIs) have sold Rs 60,859 crore worth of equities in Indian markets till January 22, 2025. Between October, 2024 to current week, FIIs have sold over Rs 1.52 lakh crore worth of equities in Indian markets. Softness in corporate earnings, rupee’s continued weakness and the higher valuations of the Indian markets have been some of the reason why the FII outflow continues. At current levels, FIIs are seen reallocating funds to other attractively valued EM peers. The dollar’s strength has also made the US stocks attractive.

Earnings concerns

The Q3 earnings though largely inline, have been subdued. The earnings pain is expected to continue for a another couple of quarters and this raised investor concerns about the overall corporate growth. Though factored in, this continues to be a sentiment negative and as a result has been weighing on the market.

Selling pressure in large caps

The large caps stocks has been seeing significant selling pressure. The markets ended in the red today, Friday (January 24). For the week too, the market clocked significant losses. The Nifty closed below 23,100 on Friday and is down 3% for the week. 23,200 was a key support level for the Nifty and the close below these levels is something that concerns investors. The Sensex ended the week flat but in red.

Speaking on the market performance,  Shrikant Chouhan, Head Equity Research, Kotak Securities said, “Indian equity markets continued its underperformance versus most global markets this week. Broader market remained weak with the midcap and the smallcap indices underperforming the larger peers. Majority of the sectoral indices ended the week in the red with BSE realty index witnessing sharp correction. BSE IT index was an outlier as it performed strongly in a relatively weak market. FII continue to remain net seller of Indian equity, adding pressure on the market performance. Q3FY25 earnings season has largely in line with our subdued expectations. The rupee appreciated marginally and Brent crude has corrected this week. Multiple events including global events, upcoming Union Budget, RBI policy and ongoing Q3FY25 season will continue to shape market movements over the next fortnight.”

Budget 2025 on February 1

All eyes are now on the upcoming Budget on February 1. Investors would be looking for cues from the Finance Minister’s speech for the next trigger.