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

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December 02, 2025

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 buyingAccording 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 dealRBI’s upcoming interest-rate decisionBoth 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 nowShenoy 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 cheapDespite 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 opportunitiesWithin the midcap universe, Shenoy is constructive on:Public sector banks – gaining market share through efficiencySelect financialsManufacturing and electrical infrastructure playsFinancial 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.