India-Centric Firms and Domestic Flows Fuel Powerful Midcap and Smallcap Rally
India’s midcap and smallcap stocks have made a sharp comeback, dramatically outperforming bluechip counterparts in the latest stock market rally. Since April 7, the Nifty Midcap 100 and Nifty Smallcap 100 indices have gained 13.2% and 11.4% respectively, beating the Nifty 50’s 9.6% and Sensex’s 8.6% gains over the same period, according to Bloomberg data.
This resurgence comes after months of underperformance and valuation-driven corrections that rattled investor confidence in broader market segments. Analysts attribute the turnaround to a combination of technical breakouts, easing foreign investor pressure, and resilient domestic demand, particularly in India-centric sectors insulated from global uncertainties.
Highlights:
Nifty Midcap 100 and Smallcap 100 up 13.2% and 11.4% respectively since April 7.
Outperformance surpasses gains in bluechip benchmarks like Nifty and Sensex.
Rally driven by easing FII selling, domestic liquidity, and India-focused themes.
Technical Breakouts and Sentiment Shift Trigger Market-Wide Rebound
According to Rajesh Palviya, Head of Technical and Derivative Research at Axis Securities, the breakout above the 50- and 100-day moving averages by both Nifty and Bank Nifty served as a catalyst. This technical shift signaled a short-term bullish trend, prompting renewed participation across broader segments that had been deeply oversold.
Once large-cap indices stabilized, investor focus swiftly rotated to midcap and smallcap stocks, many of which were trading at depressed levels. The absence of significant sellers in these segments, coupled with returning investor confidence, allowed even modest trading volumes to produce outsized price movements.
Highlights:
Technical breakouts above 50- and 100-day moving averages drove sentiment.
Oversold midcap and smallcap stocks attracted renewed investor interest.
Modest volumes were sufficient to lift prices amid absence of sellers.
Domestic Institutions Drive Momentum Amid FII Consolidation
While foreign institutional investors (FIIs) largely focus on large-cap stocks, the current rally in the mid- and small-cap space has been led by domestic mutual funds and high-net-worth individuals (HNIs). These investor groups, more aligned with India’s long-term growth narrative, played a central role in the rebound.
Palviya points out that domestic flows acted as the backbone of the rally, particularly in its early stages when FII outflows moderated and investor comfort returned. Many domestic investors held onto their positions, unwilling to sell at undervalued prices, reinforcing upward momentum.
Highlights:
Domestic MFs and HNIs are key drivers of mid- and small-cap surge.
FIIs remain focused on largecaps, while local investors back broader market.
Investor conviction in India’s long-term story fuels sustained buying interest.
Sectoral Leadership: Defence, Chemicals, Fertilisers, and Infra Surge
The rally has been broad-based, cutting across multiple sectors, particularly those aligned with structural or policy tailwinds. Defence stocks have seen renewed interest, driven by improving order books and prior underperformance. Fertiliser and chemical stocks have also gained ground on the back of monsoon expectations and global supply chain diversification, favoring Indian exporters.
Further, the government’s capital expenditure push, particularly in rural infrastructure, has bolstered consumption plays in FMCG and agriculture-linked sectors. Textile companies, seen as beneficiaries of US-China trade tensions, and railway infrastructure firms have also contributed meaningfully. Meanwhile, power sector stocks have risen amid forecasts of elevated electricity demand driven by extreme weather conditions.
Highlights:
Defence, fertiliser, and chemical stocks lead sectoral gains.
Govt capex boosts rural demand; infrastructure stocks gain momentum.
Textiles and power stocks rise on global shifts and demand expectations.
Valuation Concerns Persist Despite Recent Correction
Despite the impressive rally, Palviya remains cautious on valuations. While the correction earlier this year did deflate excessive valuations, the broader market is not yet in a deep value zone. Investors are increasingly focusing on companies with clear earnings visibility and structural tailwinds, even if they come at a premium.
Palviya warns that while liquidity and sentiment have improved, valuation discipline remains crucial. “Valuations are not extremely attractive, but investors are chasing names with strong fundamentals and sustainable growth stories,” he stated.
Highlights:
Market not yet in deep value territory despite earlier correction.
Focus remains on earnings visibility and structural growth themes.
Investors exercise selectivity, avoiding indiscriminate buying.
Year-to-Date Performance Still in Negative Territory
Despite the strong rebound since April, both the Nifty Midcap 100 and Nifty Smallcap 100 indices remain in the red for the calendar year 2025, down 4% and 9.5% respectively. The earlier sell-off, driven by valuation concerns and global macro uncertainty, had significantly dented broader indices.
However, the latest leg of the rally reflects a recovery in sentiment and a potential base formation for further gains—especially if earnings season delivers positive surprises and policy momentum continues into the upcoming election season.
Highlights:
Midcap and Smallcap indices still down YTD despite recent rebound.
Previous declines caused by global risk-off sentiment and overvaluation.
Current rally could signal broader recovery if earnings and policy align.
