The BSE MidCap and SmallCap indices lost over 2 percent each as investors rush to take some money off the table, after rallying 6.5 percent so far this year, while the benchmark Sensex and Nifty 50 traded flat at mid-day on February 9.
Dhananjay Sinha, co-head of equities and head of research for strategy and economics at Systematix Group, said the RBI and the US Fed's unexpected decision not to cut rates may have prompted selling in the midcap and smallcap segments.
The recent market decline follows hawkish policies from the Reserve Bank of India and the US Fed, with both the central banks refraining from rate cuts. Top economists and central bankers anticipate protracted higher interest rate regimes. The Federal Reserve held the rates steady citing the need for more data to be confident about progress in its fight against inflation. In India, the Reserve Bank's Monetary Policy Committee retained key policy rates, aligning with expectations, saying that the war against inflation was over yet.
The smallcap and midcap segments have outperformed the largecaps since the last one year, driven by retail and HNI participation. Sectors like railways, PSU firms, and defence saw surges, attracting investor interest. However, some investors, avoiding high risk, opted for partial profit-booking, analysts said.
They added that midcaps and smallcaps were undergoing corrections, likely due to profit-taking after a significant run-up. With the conclusion of the result season and no new triggers after the RBI and the US Fed policies, investors are engaged in churning and rotation, seeking fresh opportunities.
"The slightly hawkish credit policy indicates reluctance to cut rates easily, possibly not until June or July. This tight liquidity scenario is also dampening the sentiment. We have seen private banks falling less while PSU banks see huge correction," said Shrikant Chouhan, analyst at Kotak Securities.
Indian markets surged since April 2023 on improved economic conditions, strong fundamentals, robust earnings, political stability, and expected lower inflation. Foreign and domestic investments further boosted sentiment.
Since April 2023, both the benchmark indices surged nearly 20 percent each, while the broader markets BSE MidCap and SmallCap jumped over 45 percent each. FIIs invested around $21 billion and DIIs Rs 1.81 lakh crore in Indian equities in 2023.
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