Retail deleveraging has triggered the biggest rout in Indian small-cap stocks in seven months, as mounting concerns over inflation and higher interest rates weigh on sentiment. The selling was exacerbated by unwinding of positions funded by margin loans, hitting one of the few pockets of India's $4.8 trillion market that have bucked broader weakness this year. An index of small-cap companies tumbled as much as 3.7% Friday, the most since March 23 and erasing its gain for the year.
Smaller stocks account for the majority of leverage-based wagers by retail traders, and forced unwinding of these positions has likely left retail investors with mark-to-market losses of 90 billion rupees, according to Kotak Neo's Chief Business Officer Ashish Nanda. "There's a liquidity crunch on the small-cap side, with a lot of selling driven by leverage and fear," said Thomas Priju, a portfolio manager at Mumbai-based investment firm Karma Capital. Stocks with sound fundamentals may offer attractive buying opportunities at these levels. Small caps had been outperforming until the recent resurgence in oil drove up bets on further central bank rate hikes to tame inflation.
Their earlier rally had been fueled in part by large inflows into mutual funds this year, with small-cap funds receiving a record 104 billion rupees and mid-cap plans drawing 78.3 billion rupees in September, according to the Association of Mutual Funds in India. Despite this week's selloff, the Nifty Smallcap 250 Index is on pace to beat the benchmark NSE Nifty 50 Index for the third time in four years.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing