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More than 120 smallcap stocks delivered double-digit gains in the week gone by, marking one of the sharpest short-term rallies in the segment in recent months. The rally was broad-based, cutting across textiles, auto ancillaries, infrastructure, chemicals, consumer and capital goods.

Stocks such as VTM, Gokaldas Exports, Garware Hi-Tech Films, Faze Three and United Foodbrands surged between 35% and 45% in just five trading sessions, while several others posted weekly gains in the 20% to 30% range. Even traditionally steady names in pipes, engineering, auto components and consumer discretionary joined the rally, signalling a sharp improvement in risk appetite.

The move comes after months of relentless selling in small and midcaps, during which valuations corrected sharply despite earnings holding up in several pockets. Analysts estimate that over a third of the smallcap universe, representing nearly Rs 16 lakh crore in market capitalisation, is now trading at fair or even undervalued levels compared with historical averages.

According to Ponmudi R, CEO of Enrich Money, the overall market has entered a consolidation phase after digesting major policy triggers. “With the Union Budget 2026 and the RBI’s monetary policy decisions now largely priced in, investor focus has shifted to implementation, capex execution and the pace of actual spending,” he said, adding that sentiment remains cautiously optimistic and event-driven in the near term.

Currency movements and foreign portfolio investor flows are also playing a role. The recent recovery in the rupee from record lows, aided by the India-US trade agreement announcement, has improved near-term confidence. At the same time, easing foreign selling pressure has reduced the supply overhang that weighed heavily on smallcaps through the previous quarter.

Also Read | Radhika Gupta urges investors to ignore ‘cats’ and think like a goldfish amid market chaos

Arjun Guha Thakurta of Anand Rathi Wealth believes the recent correction created a disconnect between stock prices and business fundamentals. He points out that while many smallcap stocks fell sharply, earnings growth across the segment remained reasonably 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.
“When weak hands have already sold, even modest improvements in confidence can lead to sharp recoveries, 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, said investors should differentiate between structural stories and tactical trades.

“Smallcap companies typically operate with narrow product lines or concentrated business models. Benefits from policy changes such as lower tariffs will be meaningful only for companies with direct exposure to export-linked sectors,” he said.

Macro risks also remain on the radar. Investors are closely tracking January consumer price inflation data, which will be released using a revised base year of 2024 and is expected to offer a more accurate picture of consumption trends. Global developments, particularly geopolitical negotiations involving the US and Iran, could also inject volatility into commodity prices and risk assets if tensions escalate.

Data: Ritesh Presswala

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times.)

Agreements with the US and the European Union helped ease fears that geopolitics and tariff turbulence would continue to weigh on the $5.2 trillion market. That relief, however, has done little to offset concerns over corporate fundamentals, especially after Indian stocks posted the worst January returns among major global peers.

Earnings growth has lagged for months, the rupee has weakened, and foreign investors have treated India as a source of funding to chase artificial intelligence-driven rallies in China, Taiwan and South Korea. Adding to the gloom, Indian tech heavyweights such as Tata Consultancy Services Ltd. and Infosys Ltd. have been swept up in a global software selloff, as Anthropic’s latest AI advances threaten to disrupt traditional outsourcing business models.

“India will continue to be seen as a funding market, at least for now,” said Vivek Dhawan, a fund manager at Candriam NV. “In terms of earnings growth recovery, where we see weakness is on the software services side.”

Earnings for the MSCI India Index are projected to grow about 8.3% over the next year, trailing regional peers, according to data compiled by Bloomberg. That compares with forecast growth of roughly 16% for China, about 108% for South Korea and close to 30% for Taiwan.

The index trades at about 22 times forward earnings estimates, in-line with its long-term average. Relative to other emerging markets, however, India still trades at a premium.
The valuations are less attractive, “accounting for the growth trajectory and scope for earnings recovery, which is likely to stay selective rather than broad based,” said Ecaterina Bigos, chief investment officer Asia ex-Japan, at BNP Paribas Asset Management’s at AXA IM. The balance “points to a cautious optimism on Indian equities, with focus on strategic areas of growth for now.”

The sentiment underscores one of the most challenging periods since India emerged as a favorite among global investors betting on the world’s fastest-growing major economy and its vast domestic market. Persistent geopolitical risks and pockets of economic slowdown have dulled the appeal of Indian equities since the start of 2025.

The result was India’s worst underperformance versus emerging markets in decades last year. Foreign investors pulled a record $19 billion from local stocks even as economic growth outpaced rivals. Over the past 12 months, the MSCI India Index has gained 8%, with dollar returns eroded by rupee weakness. In contrast, the MSCI Emerging Markets Index has surged almost 38%.

To be sure, there are signs of tentative improvement. Indian equities are on track for a second straight week of foreign inflows — a streak not seen since October.

“The tariffs were hurting Indian exporters and, more importantly, significantly hurting the rupee,” said Ashish Chugh, head of global emerging-market equities at Loomis, Sayles & Co. “That created a negative feedback loop — rupee weakness led to foreigners selling equities, which led to more rupee weakness. The trade deal stops that loop and, in my view, reverses it.”

US President Donald Trump signed an executive order to eliminate a punitive 25% tariff on Indian goods imposed for the country’s purchase of Russian oil. A joint statement by both the countries showed that a so-called “reciprocal” duty on Indian goods was also cut to 18% from 25%.

The new rate offers significant relief to Indian exporters after they were tariffed at 50%, among the highest in Asia. The South Asian nation also agreed to purchase $500 billion worth of American products over five years including aircrafts, graphics processing units and energy, while promising to reduce non-tariff barriers for US companies.

The rupee now looks undervalued, with India’s real effective exchange rate near a decade low, according to Chugh. He expects macroeconomic fundamentals to remain supportive, with earnings accelerating next year after a period of subdued profit growth.

More bullish investors argue that the trade deals, combined with the recent state budget, could ignite a major rally.

“Now’s the time to buy India,” said James Thom, senior investment director of Asian equities at Aberdeen Investments, who said his Asia ex-Japan equity portfolio has been consistently overweight India. “Quality companies are well positioned for the next cycle.”

Markets initially welcomed the tariff truce, with the US cutting its levy on Indian goods to 18% from 25% — lower than for most Asian peers — while scrapping an additional 25% punitive duty linked to purchases of Russian oil. Indian stocks jumped the most in eight months after US President announced the deal, while the rupee gained 1.1% against the dollar. The longer-term impact, however, remains uncertain.

While the agreement acts as a “booster of confidence,” it does not necessarily change his view on GDP growth outlook over the next 12 months or that for equity earnings, Sanjay Mookim, JPMorgan Chase & Co.’s India strategist said in an interview with Bloomberg Television on Friday.

Roblox RBLX 2.82%increase; green up pointing triangle expects its growth to continue this year after revenue climbed in its latest quarter, boosted by higher bookings and daily active users.

The videogame company said Thursday it projects revenue up 23% to 29% this year, following 43% revenue growth in its latest quarter.

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