Smallcaps lag, FIIs quiet, valuations stretched: Deepak Shenoy on what’s holding back the market rally

Even as the Nifty 50 finally broke its 14-month jinx and reclaimed record highs, the broader market continues to show clear signs of strain, says Deepak Shenoy, Founder & CEO, Capitalmind MF. Speaking to ET Now, Shenoy cautioned that the rally remains narrow and lacks meaningful breadth.

“Smallcaps are actually down 5% in 2025. More than 40% of Nifty 500 stocks are still 10% below their all-time highs. So the market has not delivered a true breakout,” he said.

Breadth missing, FIIs still not buying

According to Shenoy, foreign investors are not yet returning in a meaningful way. Some inflows are coming via the primary market, but secondary market buying remains subdued.

Key triggers investors are watching:

• A potential US–India trade deal
• RBI’s upcoming interest-rate decision

Both events, he says, may not trigger an immediate market spike but could set the stage for improved capex and economic momentum.

Why a rate cut matters now

Shenoy believes the RBI’s reluctance to cut rates is increasingly difficult to justify.

“Inflation is at 0.25%, manufacturing inflation is very low, yet businesses are borrowing at 7–8%. The gap between inflation and the repo rate is now over 5%, which is extremely high,” he noted.

Holding rates high to protect the currency, he argued, has not worked: “The rupee has already gone to 89.6. There is no point hurting manufacturers just to save the currency.”

He added that a status quo could be a “policy disappointment,” even if markets may not react sharply in the short term.

Smallcaps: Attractive yet not cheap

Despite a lack of rally in the smallcap space, Shenoy cautions that valuations still look elevated.

“Mid and smallcaps are not cheap. Some are priced for high growth; some are simply overpriced with no justification,” he said.

However, long-term opportunities do exist:

“Some smallcaps today will become midcaps and largecaps over the next decade. Stock-selection is key.”

Where he sees opportunities

Within the midcap universe, Shenoy is constructive on:

• Public sector banks – gaining market share through efficiency
• Select financials
• Manufacturing and electrical infrastructure plays
• Financial infrastructure companies like exchanges and asset managers

“These sectors show strong structural growth and are benefiting from rising credit demand and capex cycles,” he added.