India's Small and Mid-Cap Stocks Surge Amid Slowing Growth in Large-Cap Equities

India's small- and mid-cap segments have delivered strong gains through January 2026, with the S&P BSE SmallCap Index rising 8.7% and the S&P BSE MidCap Index advancing 7.4% month-to-date, compared to a 2.1% increase in the S&P BSE 500. This divergence has been driven by weakening performance in large-cap stocks, where the Nifty 50 posted a 1.3% decline during the same period, marking its first monthly drop in four months. The underperformance of large-cap firms, particularly in sectors like IT and consumer goods, has sparked investor repositioning. Companies with market capitalizations below ₹25,000 crore have seen earnings momentum accelerate, with 58% of mid-cap firms reporting revenue growth above 15% in Q3 FY2026, outpacing the 32% of large-cap peers achieving similar figures. This shift underscores a growing preference for companies with faster operational expansion and stronger domestic demand exposure. Investor sentiment has also been influenced by concerns over external headwinds, including new trade policy proposals affecting Indian exports. While specific tariffs have not yet been implemented, market participants are pricing in potential risks, which have disproportionately impacted export-reliant large-cap conglomerates. In contrast, smaller firms with localized supply chains and integrated distribution networks have demonstrated resilience. The move toward small- and mid-cap stocks is also supported by improved credit availability and lower discount rates in private equity and venture capital funding, with fresh deal volume reaching ₹18,700 crore in December 2025—a 44% year-on-year increase. This liquidity infusion is boosting growth prospects for mid-tier companies across manufacturing, healthcare, and specialty chemicals.