The Nifty Smallcap 100 index has plunged by more than 12% this month, making it the worst performance since the market turmoil of March 2020 during the Covid-induced panic selling. On January 27, the index extended its downward slide, falling by 3-4%, exacerbating concerns among investors. This sharp decline has led to a broader sense of unease in the market, especially as mid and small-cap stocks have struggled to recover.
At around 10:45 AM IST, not a single stock in the Nifty Smallcap 100 index was in the green. Across-the-board selling saw stocks tumble as much as 5%, indicating widespread pessimism about the sector’s outlook. The downward trend is the third consecutive week of losses for the mid and small-cap indices, and analysts attribute the selloff to several factors, including weak earnings, subdued consumption, and a weakening rupee.
What’s Driving the Decline in the Smallcap Sector?
The month-long fall in the Nifty Smallcap 100 index has caused a ripple effect across the broader market. Experts say that several key factors are contributing to the current market weakness.
Foreign Selling and Weak Sentiment
A significant driver behind the selloff is the continued foreign institutional investor (FII) outflows. Foreign investors have been pulling back from the Indian stock market, citing concerns over the global economic outlook and the challenges facing the Indian economy. This has contributed to a souring of sentiment around mid and small-cap stocks, which are typically more volatile and thus more susceptible to changes in investor confidence.
The persistent foreign selling has compounded the weakness in the small-cap segment. With global markets also facing challenges, particularly in the U.S. and Europe, the Indian smallcap space has not been immune to the overall market downtrend.
Weak Earnings and Soft Consumption
Another key concern is the weak earnings report from Indian companies in the December quarter. The smallcap stocks, in particular, have been struggling to post positive earnings growth, further discouraging investors. Many sectors have been slower to recover than expected, leading to a broad market retreat.
The sluggish consumption growth has added to the pain, as several consumer-driven sectors face slower demand. The impact of high inflation, coupled with a weakening currency, has placed additional pressure on these stocks.
Seasonality and January Effect
Historically, January has not been a strong month for the Nifty Smallcap index. Over the past 14 years, the index has delivered negative returns in 57% of Januarys, which points to a seasonal weakness during the early months of the year.
In January 2025, this weakness was more pronounced, as the smallcap index saw its first double-digit fall since February 2022. The market’s tendency to struggle during this period, combined with the macroeconomic factors at play, has led to this sharp downturn.
The Bigger Picture: Is the Market Heading for a Long-Term Slide?
While January’s drop is substantial, it’s worth noting that the Nifty Smallcap 100 index has historically recovered from similar slumps. In 2020, after the Covid-related crash, the smallcap index rebounded strongly, ending the year up by more than 21%. Over the last five years, excluding 2022, the Nifty Smallcap index has posted double-digit positive returns, showing that this segment has the potential for a recovery.
However, the key question now is whether the current downturn is a short-term blip or the beginning of a prolonged slide. Analysts are keeping a close watch on upcoming corporate earnings, consumption trends, and currency movements to gauge whether the market can turn around or whether this will be a deeper correction.
Potential for a Recovery?
Despite the weak performance this month, some analysts are hopeful that the Nifty Smallcap index can recover in the coming months, especially if corporate earnings improve and global economic conditions stabilize. The resilience shown by smallcap stocks in previous years suggests that a recovery could be in the cards, but it may take time.
In the meantime, investors will need to carefully evaluate the risks of investing in the smallcap space, particularly in the face of continued global uncertainty and domestic challenges.
