Smallcap, midcap indices crack 3% amid FII outflows, rising crude prices

So far in October, foreign institutional investors have net sold shares worth Rs 30,720 crore.

After opening in the green, the smallcap and midcap indices quickly gave up their gains to tumble almost three percent in the morning session on October 7, following in the cues of the benchmark Nifty 50 index.

According to Ruchit Jain, Research Analyst at discount brokerage 5Paisa, the correction is an extension of losses seen over the past week. FIIs have been selling en masse, lured by the cheaper valuations of the Chinese stock markets following the China stimulus.

This massive outflow, combined with rising geopolitical tensions and bolstering oil prices, has caused a correction in the frontlines. However, Jain explained, when we see an uptrend in the market, the midcap and smallcap indices usually outperform the Nifty 50 and Sensex.

By the same logic, during corrections or downturns, midcaps and smallcaps tend to decline just as sharply, especially due to the high beta nature of the stocks in these indices.

At 11.10 am, the Nifty Midcap 100 fell 2.3 percent while the Nifty Smallcap 100 cracked 2.8 percent.

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The tensions in the Middle East have caused oil prices to react sharply, which also causes an adverse impact on the domestic markets, increasing inflationary expectations in the short-term and dampening the market sentiment.

India is highly reactive to any hikes in oil prices, especially in terms of the current account deficit, as a large percent of the energy needs are imported. This creates severe pressure on the currency, said Vinit Bolinjkar of Ventura Securities.

High oil prices are also adding to the FII sell-off. When foreign investors invest in the domestic markets, they always factor in a certain percent of currency risk. However, if the currency continues to depreciate beyond expectations, FIIs will rush to pull out their money, added Bolinjkar.

So far in October, foreign institutional investors have net sold shares worth Rs 30,720 crore and analysts expect FPI flows to remain volatile. On the other hand, over the past five sessions, China-dedicated funds have seen staggering inflows worth over $13 billion.

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