Here is why NIFTY Midcap and Smallcap indices rallied over 2% today

Apart from the global cues, Indian markets are also witnessing a short-covering rally as FIIs were seen reducing their short positions from the previous trading session.

The rally was much more broad-based, as the broader market indices, like mid-cap, small-cap, and microcap indices, extended their morning gains in the closing session.

The NIFTY Midcap 100 jumped more than 2%, or 1,055 points, on Tuesday at 49,535, led by gains in fintech companies like Policybazaar and Paytm, which were up by 7%, and some financial services names like Poonawalla Fincorp and IREDA, which gained more than 5% during the session.

91 stocks out of 100 traded in the green, and nine traded in the red. The nine losing stocks include names like Bharti Hexacom, MRPL, Mankind Pharmaceuticals, SRF, KPIT Technologies, Hindustan Petroleum, SBI Card and Payments, and more.

The NIFTY Smallcap 100 index jumped more than 2.6%, or 400 points, at 15,375 levels on Tuesday. The index witnessed a sharp correction of more than 26% from the record high levels touched in December 2024.

The index is now up by 7% from the 52-week low levels made on March 3, 2025. 91 stocks traded in the green and nine traded in the red on Tuesday.

The top gainers from the index include Raymond, Triveni Turbine, Finolex Cables, Welspun Living, Apar Industries, 360 One Wealth & Asset Management, and more, which rallied up to 15% in Tuesday's trading session.

Affordable Valuations

The broader market valuations were in the excessive category throughout 2024 after the index witnessed a sharp one-way rally of 121% from March 2023. However, the earnings growth tapered down in Q1 and Q2 of FY25, leading to unaffordable valuations for many companies.

After the recent 26% drop in the broader indices, the valuations are showing signs of affordability. The NIFTY smallcap 100 index price-to-earnings ratio currently stands at 25x, nearly 30% down from the peak valuations of 36x in December 2024.

Secondly, the earnings of NIFTY Smallcap 100’s earnings have shown signs of bottoming out in Q3 FY25, giving investors opportunities to add quality stocks available at affordable prices.

Broader market sentiment

The broader market sentiments have changed from bearish to bullish as a sharp correction has provided ample opportunities with a better risk-to-reward ratio on a fundamental basis.

The equity inflow in the mid-cap and small-cap categories continued to remain positive despite a sharp correction, indicating broader confidence in these categories of stocks.