India’s stock market has been going through a rough patch, especially for small- and mid-sized companies. According to a new report from Jefferies, a global financial firm, the struggles for these stocks might continue for a while.
Christopher Wood, Jefferies’ global head of equity strategy, wrote in his well-known Greed & Fear report that mid- and small-cap stocks need to fall closer to the prices of big, stable companies—called blue-chip stocks—before the market correction can truly end. Until that happens, investors might remain cautious.
A Steep Fall for Smaller Stocks
The data shows how much small- and mid-cap stocks have suffered. The Nifty Midcap 150 index, which tracks medium-sized companies, has dropped by more than 19% since its peak in September 2024. The Nifty Smallcap 250 index, which represents smaller firms, has fallen even further—down 24%.
In contrast, the Nifty 50, which includes India’s top 50 companies, has only declined by 13%. This means that while the overall market has been shaky, smaller companies have been hit the hardest.
Wood warns that things could get worse in the next three months. If these stocks continue to decline and start showing losses over an entire year, investors who put money into small- and mid-cap-focused mutual funds might panic and withdraw their money. This could trigger even more selling, pushing stock prices down further.
Why Are Small and Mid-Cap Stocks Falling?
The Jefferies report explains that this selloff is not caused by major economic problems but is more of a “technical” issue. This means that the market drop is due to how investors are reacting to stock prices rather than any serious weakness in India’s economy.
Some of the hardest-hit sectors include:
Real estate
Infrastructure
Manufacturing
These industries performed very well last year but are now suffering because they are more sensitive to market ups and downs.
Positive Factors That Could Help
Despite the current downturn, there are reasons to remain hopeful. One major support system for India’s stock market is Systematic Investment Plans (SIPs). Many investors in India put money into mutual funds every month through SIPs, creating a steady flow of investment. Fund managers believe this could help stabilize stock prices.
Another factor is government policies. Prime Minister Narendra Modi’s government, in its third term, has shifted towards a more “populist” approach. This means it is focusing on policies that directly help common people, such as:
Cash handouts to increase rural spending
Tax cuts to boost urban demand
These measures could lead to higher consumer spending, which may benefit businesses and support the economy.
The report also notes that India’s private sector capex cycle (business investments in new projects) is still intact. Many companies remain financially strong, with low debt, and banks are willing to lend. Additionally, the tight credit policies that previously put pressure on businesses have now eased.
The Role of the U.S. Federal Reserve
A major external factor influencing India’s stock market is the U.S. Federal Reserve. If the Fed cuts interest rates, it will reduce financial pressure worldwide, including in India. Lower U.S. interest rates could attract foreign investors back to Indian stocks, reversing some of the recent outflows.
Market Outlook: Uncertain but Not Hopeless
Despite the challenges, India’s stock market has held up better than expected. The earnings projections for companies in the Nifty index for fiscal year 2025 have only been reduced by 0.4% after the third-quarter results. This means that while stock prices have fallen, the actual financial performance of companies remains stable.
Jefferies Adjusts Its Investments
In response to the changing market, Jefferies has adjusted its investment strategy.
New Additions:
InterGlobe Aviation Ltd. (IndiGo) – India’s largest airline has been added to the Jefferies portfolio with a 4% share.
Reductions:
Coal India Ltd. – Removed entirely from the portfolio.
Thermax Ltd. – Investment reduced by 1%.
Global Changes:
ICICI Bank Ltd. – Investment reduced by 1%.
Alibaba Inc. – Funds moved into this Chinese tech giant, showing Jefferies’ interest in opportunities outside India.
What’s Next?
For now, small- and mid-cap stocks could face more struggles, especially if losses continue and investors withdraw their money. However, long-term investors still have reasons to stay optimistic.
Government support, steady company earnings, and potential interest rate cuts from the U.S. could help stabilize the market. If valuations become more reasonable and confidence returns, small- and mid-cap stocks might recover in the future.
For investors, this is a reminder that while markets can be unpredictable, patience and careful investment decisions are key to navigating the ups and downs.
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