India’s small-cap segment is under severe pressure, with nearly 80% of small-cap stocks on the BSE correcting 20–90% from their peaks, sharply denting investor wealth and sentiment. Retail investors, who typically have higher exposure to small-caps, are likely to be the worst affected by the ongoing sell-off.
Data from Capitaline shows that 946 of the odd 1,200 small-cap stocks have declined more than 20% from their highs—a threshold that marks entry into bear territory. The numbers highlight the depth and breadth of the downturn, underscoring how deeply entrenched the bear phase has become for small-cap investors.
India-US trade deal: Hope for small-cap stocks?
As valuations reset and sentiment remains fragile, the spotlight is now on whether a potential India–US trade deal could act as the catalyst needed to halt — or even reverse — this prolonged bear phase.
The day after US President Donald Trump announced the India-US trade deal, which involves lowering tariffs from 25% to 18%, Ashish Kacholia — well-tracked stock market investor whose portfolio leans heavily towards large-caps — posted on X that “looks like the bear market in small caps has officially ended with Donald Trump’s tweet signing trade deal with India”.
Early signs of green shoots in the broader market space are already visible as the small-cap indices have risen 4% in February so far.
The trade deal is seen as incrementally positive for MSME-linked sectors such as textiles, leather, chemicals and auto ancillaries, which form a large part of the broader market universe. According to market veteran Sunil Subramaniam, once FIls return meaningfully, they are expected to channel funds into IT and pharma stocks-segments dominated by large-cap companies-while DIls are likely to rotate to mid- and small-cap names.
“This rotation, however, is expected to play out gradually, taking five to six months, with returns potentially becoming visible only after a year or more,” Subramaniam explained.
Analysts believe that the trade deal, while an important catalyst, cannot be the sole driver. They believe that amid elevated valuations, earnings need to revive meaningfully.
“Such a deal would improve confidence around exports, manufacturing, and supply chains, which could benefit select small-cap companies linked to these areas. It may also attract incremental foreign interest and reduce global uncertainty, giving the market some breathing room. However, small-caps are currently under pressure mainly due to stretched valuations, earnings slowdown, tighter liquidity, and risk aversion. Unless earnings visibility improves and domestic liquidity stabilises, rallies driven by trade news may remain short-lived,” said Dr Ravi Singh, Chief Research Officer at Master Capital Services.
His views were echoed by other analysts, too.
Abhinav Tiwari, Research Analyst at Bonanza, said that if Q4FY26 performance shows early signs of revenue pickup and margin stability, it could act as a trigger for sentiment improvement and selective PE rerating in smallcaps.
Small-cap index to rise 10-20%
Vinit Bolinjkar – Head of Research – Ventura, projects the Nifty Smallcap 100 to reach 18,800-20,000 by year-end, implying 10-20% upside from current levels. His optimism stems from post-correction outperformance patterns, intact fundamentals in sectors like manufacturing and defence, and improving economic conditions.
Smallcaps have seen some rebound post-announcement, but sustained recovery needs FII inflows and broader earnings growth, he added.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions.
