Midcap Recovery Led by Macro Tailwinds, Improved Earnings, and Return of Foreign Investors
Midcap stocks in India have staged an impressive comeback in 2025 after a volatile start to the year, with the Nifty Midcap 100 index recovering nearly all its early-year losses. Following a sharp 16% decline between January and April 9—coinciding with former U.S. President Donald Trump’s announcement of a 90-day pause on reciprocal tariffs—the index has since rebounded and now trades just 0.3% lower year-to-date (YTD). Analysts are optimistic that this rally could sustain, supported by improving macroeconomic factors, easing inflation, reviving foreign inflows, and favorable valuations following the steep correction.
Highlights:
Nifty Midcap 100 has recovered from a 16% drop and is now just 0.3% lower YTD.
Rebound triggered by cooling inflation, foreign portfolio inflows, and strong earnings.
Analysts cite favorable macros and improved sentiment as key drivers of the rally.
Broader Market Participation Strengthens the Midcap Rally
The current midcap rally, which initially began with non-banking financial companies (NBFCs) and defence sector names, has broadened to include a wide array of rate-sensitive sectors, including metals, real estate, and automobiles. With inflation cooling and expectations of continued policy accommodation, these sectors are gaining traction, reinforcing the breadth of the market’s recovery. The turnaround is also being fueled by strong quarterly earnings from midcap companies, bolstering investor confidence.
According to Rajesh Palviya, Head of Technical Research at Axis Securities, midcaps are well-positioned to continue their upward movement unless disrupted by fresh negative developments. The deep correction witnessed since October 2024 has allowed valuations to reset, offering an attractive entry point for investors looking for long-term growth exposure in the midcap space.
Highlights:
Midcap rally has expanded beyond NBFCs to metals, real estate, autos, and other rate-sensitive stocks.
Valuation reset post-October 2024 correction has made the segment more appealing.
Strong Q4 earnings have helped underpin the rally.
Foreign Institutional Buying Returns with Strong Momentum
One of the key triggers for the midcap rebound is the renewed foreign institutional investor (FII) interest, as seen in Thursday’s Rs 5,393 crore net purchase. This influx of global capital is being interpreted as a vote of confidence in the Indian equity story, even amid increasing chatter of bargain opportunities in the Chinese market. Ruchit Jain, Vice President of Technical Research at Motilal Oswal, noted that a softer dollar index, easing geopolitical stress, and return of FII flows could sustain the momentum in midcaps through the coming quarters.
The initial rally had been driven by domestic institutional investors (DIIs) and retail participants, but the re-entry of FPIs has broadened the support base for midcaps and added greater stability to the uptrend. Improved global risk appetite and India’s robust macro fundamentals are also aligning in favor of midcap performance.
Highlights:
Rs 5,393 crore FII inflow signals renewed confidence in Indian equities.
Weaker dollar and easing global tensions supportive of foreign flows.
FPI re-entry seen as pivotal in sustaining midcap rally momentum.
Smallcaps Lag but Offer Selective Opportunities Amid Narrower Risk Appetite
While midcaps have bounced back sharply, smallcaps remain under pressure, down approximately 6.5% YTD. However, analysts are beginning to see selective opportunities in high-quality names within the segment. Jain emphasized that the smallcap space will likely not witness a broad-based rally like midcaps, cautioning that investors must be selective and prioritize companies with strong earnings visibility and clear growth trajectories.
The room for error in smallcaps remains limited, especially given the past year’s volatility, and investors are advised to steer clear of speculative plays. Instead, emphasis is being placed on fundamentally sound businesses with durable competitive advantages.
Highlights:
Smallcaps still lag, down 6.5% YTD, but pockets of value are emerging.
Analysts advise high selectivity and focus on earnings strength.
Broader rally unlikely in smallcaps due to narrower risk tolerance among investors.
Monsoon, Inflation, and Earnings to Steer Next Leg of the Rally
Looking ahead, the outlook for midcaps remains broadly constructive, contingent on monsoon performance, inflation trajectory, global cues, and the ability of companies to deliver consistently strong earnings. With domestic consumption likely to improve on softer inflation and policy continuity expected post-elections, analysts believe midcaps are poised for sustained upward movement in the medium term.
Unless disrupted by global shocks or domestic policy surprises, midcap stocks appear structurally well-placed, particularly as the valuation premium vs largecaps narrows and investor preference continues to favor companies with high earnings growth and efficient capital allocation.
Highlights:
Monsoon progress, inflation trends, and earnings consistency will be key drivers.
Policy support post-election expected to remain accommodative.
Valuation gap vs largecaps shrinking, reinforcing midcap appeal.
