India experiences sharpest decline in market capitalization since February 2023

In August, India experienced its sharpest decline in market capitalization (m-cap) since February 2023, driven by heightened volatility in mid- and small-cap segments and a lackluster performance in the large-cap space. Despite most global markets registering gains, India’s m-cap in dollar terms dropped 3.43 percent to $5 trillion, down from $5.18 trillion a month earlier, according to Bloomberg data.

The BSE MidCap and BSE SmallCap indices posted minimal growth during August, rising by only 0.4 percent and 0.5 percent, respectively. Neeraj Chadawar of Axis Securities noted that these segments now offer less valuation safety compared to large-caps, which may lead to short-term corrections in the broader market as capital flows shift towards large-cap stocks. This shift could potentially drive the Nifty 50 to new highs. However, India’s benchmark indices, Sensex and Nifty, managed only a 0.5 percent gain each during the month.

Among the top 10 global markets, India’s decline in market capitalization was the second steepest, with only China experiencing a larger drop of 3.94 percent, bringing its m-cap to $8.17 trillion. In contrast, the US market grew by 2.23 percent, reaching $58.24 trillion. Other major markets like Japan saw a modest m-cap increase of 0.06 percent to $6.74 trillion, while Hong Kong’s m-cap rose by 1.51 percent to $5.01 trillion. The UK’s m-cap grew by 2.96 percent, France surged by 3.72 percent, Canada rose by 3.78 percent, Saudi Arabia edged up by 0.4 percent, and Germany expanded by 3.07 percent. Global markets experienced significant volatility in August, driven by yen carry trade unwinding and later recovering due to expectations of a September rate cut by the US Federal Reserve.

Anil Rego of Right Horizons PMS predicts that a Federal Reserve rate cut could benefit emerging markets, with India positioned to gain from its strong economic fundamentals and government support. Sonam Srivastava of Wright Research echoed this sentiment, highlighting that investors might be looking at the long term, anticipating a shift in monetary policy towards lower interest rates, which could improve corporate earnings. Global tensions, sector performance, and supply chain issues are also shaping market sentiment.

Analysts find the long-term outlook for India’s stock market appealing, with key investment themes being “Growth at a Reasonable Price” and “Quality.” In the near term, they expect a shift towards defensive stocks from domestic cyclicals, with large-cap private banks, telecom, consumption, IT, and pharma offering better safety. They recommend staying invested while maintaining 10 percent liquidity to capitalize on market dips, focusing on high-quality companies with strong earnings visibility over the next 12-18 months.

Axis Securities remains bullish, maintaining a March 2025 Nifty target of 24,600 based on a 20x valuation of March 2026 earnings. In a more optimistic scenario, with a 22x valuation, the March 2025 target could reach 27,000.