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Rising Investor Preference for Small Indian Stocks Poses Risks Amid Market Rally

The Indian equity market has witnessed a rally that has boosted its total valuation by $775 billion in just over five months. This rally, however, has been accompanied by a noticeable shift in investor preference for smaller stocks, which raises concerns as small and mid-cap indexes show signs of overheating. In contrast to the U.S. market, where large-cap technology stocks have driven gains, India’s smaller companies are benefiting more from the ongoing economic recovery and capital expenditure.

The Nifty Midcap 100 Index has surged 37% since its March low, compared to a 16% gain in the blue-chip NSE Nifty 50 Index. This shift in leadership towards smaller stocks has been driven by a flood of funds from retail investors, indicating broader participation in the market. However, technical indicators suggest that the rally may be due for consolidation, raising caution about the near-term outlook for Indian stocks.