The move comes after months of brutal selling in small- and mid-caps, during which valuations corrected sharply despite holding up profits in several sectors. Analysts estimate that over a third of the smallcap universe, representing nearly Rs 16 lakh crore in market capitalization, is now trading at fair or even undervalued levels compared to historical averages.According to Ponmudi R, CEO of Enrich Money, the market as a whole has entered a consolidation phase after digesting key policy stimuli. “With the Union Budget 2026 and the RBI’s monetary policy decisions now largely priced in, investor focus has shifted to implementation, capital expenditure execution and pace of actual spending,” he said, adding that near-term sentiment remains cautiously optimistic and event-driven.
Currency movements and foreign investor flows also play a role. The rupee’s recent recovery from record lows, aided by the announcement of the India-US trade deal, has improved confidence in the near term. At the same time, easing foreign selling pressure has reduced the supply glut that weighed heavily on small caps last quarter.
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Arjun Guha Thakurta of Anand Rathi Wealth believes that the recent correction has created a gap between stock prices and business fundamentals. He points out that while many small-cap stocks fell sharply, earnings growth across the segment remained fairly healthy. Much of the selling, he said, was driven by risk aversion, global uncertainty and foreign outflows, rather than a collapse in underlying business performance.
“If weak hands have already been sold, even modest improvements in confidence can lead to a sharp recovery, especially in segments that have underperformed for extended periods,” Thakurta said, cautioning, however, that selectivity remains crucial.
Not all experts are convinced that the rally marks the start of a sustained uptrend. Ravi Singh, Chief Research Officer at Master Capital Services, says investors should distinguish between structural narratives and tactical trades.
“Small cap companies typically operate with narrow product lines or concentrated business models. Benefits from policy changes such as lower tariffs will only be meaningful for companies with direct exposure to export-related sectors,” he said.
Macro risks also remain on the radar. Investors are closely watching January consumer price inflation data. These will be published based on the revised base year 2024 and are expected to provide a more accurate picture of consumption trends. Global developments, especially geopolitical negotiations involving the US and Iran, could also inject volatility into commodity prices and risk assets if tensions escalate.
Details: Ritesh Presswala
(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of The Economic Times.)
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