India's Small-Cap Market Faces Severe Downturn, 80% of Stocks in Bear Territory
The Indian small-cap segment is experiencing intense pressure, with a staggering 80% of small-cap stocks listed on the Bombay Stock Exchange (BSE) correcting between 20% and 90% from their recent peaks. This sharp decline has significantly eroded investor wealth and dampened market sentiment, particularly affecting retail investors who typically maintain higher exposure to these volatile stocks.
Data Reveals Depth of Market Correction
According to data from Capitaline, 946 out of approximately 1,200 small-cap stocks have fallen more than 20% from their highs, crossing the threshold that officially marks entry into bear market territory. These numbers underscore both the depth and breadth of the current downturn, highlighting how entrenched the bear phase has become for investors focused on smaller companies.
India-US Trade Deal Emerges as Potential Turning Point
As valuations reset and market sentiment remains fragile, attention has shifted to whether the recently announced India-US trade agreement could serve as the catalyst needed to halt or potentially reverse this prolonged bear phase. The trade deal, which involves lowering tariffs from 25% to 18%, was announced by US President Donald Trump and has generated cautious optimism among market participants.
Notably, prominent investor Ashish Kacholia, whose portfolio primarily consists of large-cap stocks, posted on social media platform 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 recovery are already visible, with small-cap indices rising approximately 4% in February following the announcement.
Sectoral Impact and Market Rotation Expectations
The trade agreement is viewed as incrementally positive for micro, small and medium enterprise (MSME)-linked sectors including textiles, leather, chemicals, and auto ancillaries, which constitute a substantial portion of the broader market universe. Market veteran Sunil Subramaniam anticipates that once foreign institutional investors (FIIs) return meaningfully to Indian markets, they are likely to channel funds into information technology and pharmaceutical stocks—segments dominated by large-cap companies.
Meanwhile, domestic institutional investors (DIIs) are expected to rotate toward 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 Cautiously Optimistic About Recovery Prospects
While acknowledging the trade deal's importance as a catalyst, analysts emphasize it cannot be the sole driver of market recovery. Dr. Ravi Singh, Chief Research Officer at Master Capital Services, noted that small-caps are currently under pressure primarily due to stretched valuations, earnings slowdown, tighter liquidity conditions, and heightened risk aversion.
"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," Dr. Singh stated. "However, unless earnings visibility improves and domestic liquidity stabilizes, rallies driven by trade news may remain short-lived."
Abhinav Tiwari, Research Analyst at Bonanza, added that if fourth-quarter fiscal year 2026 performance shows early signs of revenue pickup and margin stability, it could act as a trigger for sentiment improvement and selective price-to-earnings ratio rerating in small-cap stocks.
Projections for Small-Cap Index Recovery
Vinit Bolinjkar, Head of Research at Ventura, projects the Nifty Smallcap 100 index to reach between 18,800 and 20,000 points by year-end, implying a 10-20% upside from current levels. His optimism stems from historical post-correction outperformance patterns, intact fundamentals in sectors like manufacturing and defense, and gradually improving economic conditions.
"Smallcaps have seen some rebound post-announcement, but sustained recovery needs FII inflows and broader earnings growth," Bolinjkar emphasized, highlighting that while the trade deal provides a positive backdrop, fundamental factors will ultimately determine the longevity of any market recovery.
Disclaimer: This analysis is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms. Investors are advised to consult with certified experts before making any investment decisions.
