Small-caps sulk, but Sensex takes a leap beyond 74,000

US futures indicated the Dow Jones may open in the green ahead of the Fed chair's appearance at the Congress, aiding markets in India. Interest rate cuts were likely “at some point this year", chairman Jerome Powell said in a prepared testimony released later, but made it clear the Fed is not ready yet.

Domestic and foreign institutional buying catapulted the Sensex past the 74,000-mark to a new high of 74,151.27, off the day's low by a whopping 830 points, while the Nifty tested a life-high of 22,497.20, less than three points shy of 22,500. However, the recovery was uneven, with bearish sentiment ruling mid-cap and small-cap indices, which ended in the red following regulatory action against well-known shadow banks this week.

The Nifty and Sensex ended the session up a little over half a percent at 22,474.05 and 74,085.99, as foreign portfolio investors (FPIs) net purchased large caps worth a provisional ₹2,766.75 crore and DIIs bought a net ₹2,149.88 crore.

Shares such as ICICI Bank ( ₹1,113.35), SBI ( ₹790.15), NTPC ( ₹360.35) and Sun Pharma ( ₹1,607) hit fresh life highs. However, the central bank's curbs on gold lending by IIFL Finance and on IPO financing by JM Financial's NBFC triggered a 1.97% correction in Nifty Smallcap 250 to 14,684.2 and a 0.64% fall in the Nifty Midcap 150 to 17,950. Clients on the BSE net sold ₹198.51 crore worth of shares, mostly in the small-cap space.

The Nifty Smallcap 250 tanked 1.97% to 14,684.2 and the Nifty Midcap 150 corrected 0.64% to 17,950. The Nifty Microcap 250 fell 2.53% to 19,676.

While benchmarks scaled fresh highs, the Nifty Smallcap index closed 5.19% below its record high of 15,489.5 on 7 February, while the Nifty Midcap 150 ended 2.1% below its high of 18,345.1 on 8 February.

"Large-caps have begun to outperform the small- and mid-caps that were in highly stretched territory and due for a correction, which has been triggered by this week's regulatory action on NBFCs," said Gaurang Shah, senior vice-president, Geojit Financial Services . "The run-up in the markets, from now until the national elections is done and dusted in May, will be paved with choppiness. Those with a risk appetite can hope to bargain-hunt over the next two months, while those with a low appetite for risk should stay on the sidelines."

The central bank's suspension of IIFL Finance's lending against gold, followed the next day by curbs on IPO financing by JM Financial's subsidiary JM Financial Products, spooked investors on NBFC counters. Shares of IIFL Finance were down 20% for the second day in a row, closing at ₹382.20.

The other casualties were Capri Global Capital, down 14.09% at ₹248.50, JM Financial, down 10.42% at ₹85.50 and Manappuram Finance, down 6.74% at ₹173.75. The mid-cap 150 stocks hit the hardest were L&T Financial Holdings (-7.3%) , Aditya Birla Capital (-5.7%) and Piramal Enterprises (-4.07%) . Among large-cap NBFCs, Shriram Finance and Cholamandalam Finance ended down 2.25-2.4%.

In January, Madhabi Puri Buch, chairperson of the Securities and Exchange Board of India, had highlighted the use of mule accounts to manipulate IPO subscription figures, with the same PAN used across multiple accounts.

Earlier this month, the markets regulator advised mutual funds to shield investors from unexpected redemptions from small and mid-cap schemes, followed by Kotal MF restricting flows through both lumpsum and systematic investment plans.

The scrutiny on mule accounts, higher risk weights on unsecured retail loans, and the latest crackdown on two NBFCs are being seen in conjunction as weighing on the small and midcap segments of the market, according to an analyst who requested anonymity. He added that large caps would begin to outperform the small and midcap indices -- by rising more or falling less during upsides and downturns.

"For the trend following traders now, 22350/73700 would act as a key support level to watch out," said Shrikant Chouhan, head, equity reserach, Kotak Securities. "Above the same, the market could continue the positive momentum till 22575-22600/74400-74500. On the flip side, below 22350/73700 traders may prefer to exit out from the trading long positions."

According to Pranav Haldea, MD of Prime Database group, the Sebi advisory to mutual funds on small and midcap flows could have a "sentimental" impact on shares in this space and conversely, lead to outperformance by large-caps.