Record fund inflows are fueling gains in smaller companies even as India's broader stock market struggles. The National Stock Exchange of India is downsizing its long-awaited IPO and settling for a lower valuation, with the offering priced at 1,700 rupees to 1,785 rupees per share, below an earlier marketed range, and set to open on Sept. 17.

Investors hoping to end the week on a bright note are confronting a US market selloff that has spread to Asia. Oil's relentless rally has preoccupied investors this week, especially in India given its dependence on energy imports. With US Treasury yields soaring ahead of key inflation data, bets have risen that the Fed could hike rates as soon as next week.

Higher oil prices and a stronger dollar are also pressuring the rupee, making it difficult for Indian stocks to find a footing. The backdrop is hardly more encouraging for the broader market despite the small-cap rally.