Business
Smallcaps lag, FIIs quiet, valuations stretched: Deepak Shenoy on what’s holding back the market rally
“Smallcaps are actually down 5% in 2025. More than 40% of Nifty 500 stocks are still 10% below their all-time highs. So the market has not delivered a true breakout,” he said.
Breadth missing, FIIs still not buying
According to Shenoy, foreign investors are not yet returning in a meaningful way. Some inflows are coming via the primary market, but secondary market buying remains subdued.
Key triggers investors are watching:
- A potential US–India trade deal
- RBI’s upcoming interest-rate decision
Both events, he says, may not trigger an immediate market spike but could set the stage for improved capex and economic momentum.
Why a rate cut matters now
Shenoy believes the RBI’s reluctance to cut rates is increasingly difficult to justify.
“Inflation is at 0.25%, manufacturing inflation is very low, yet businesses are borrowing at 7–8%. The gap between inflation and the repo rate is now over 5%, which is extremely high,” he noted.
Holding rates high to protect the currency, he argued, has not worked: “The rupee has already gone to 89.6. There is no point hurting manufacturers just to save the currency.”
He added that a status quo could be a “policy disappointment,” even if markets may not react sharply in the short term.
Smallcaps: Attractive yet not cheap
Despite a lack of rally in the smallcap space, Shenoy cautions that valuations still look elevated.
“Mid and smallcaps are not cheap. Some are priced for high growth; some are simply overpriced with no justification,” he said.
However, long-term opportunities do exist:
“Some smallcaps today will become midcaps and largecaps over the next decade. Stock-selection is key.”
Where he sees opportunities
Within the midcap universe, Shenoy is constructive on:
“These sectors show strong structural growth and are benefiting from rising credit demand and capex cycles,” he added.
