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The benchmark indices on Wednesday rose more than half a per cent to finish at new record highs, supported by gains in banking stocks.
The S&P BSE Sensex closed above 74,000 for the first time. The 30-share index rose 409 points, or 0.6 per cent, to close at 74,086.
The National Stock Exchange Nifty closed at a fresh record high of 22,474, up 118 points, or 0.53 per cent.
However, the broader market saw intense selling pressure, with the Nifty Smallcap 100 dropping nearly 2 per cent, its worst single-day fall since February 12 when the index had crashed 4 per cent.
The overall market breadth was also weak, with 904 stocks advancing and 2,954 declining on the BSE.
The Nifty Smallcap 100 is down nearly 4 per cent this week.
Market players said the selloff in the broader markets was due to concerns over expensive valuations. Also, the decline in shares of non-banking financial companies amid fears of a wider crackdown by the Reserve Bank of India weighed on sentiment.
Kotak Mahindra Bank and Axis Bank rose more than 2.2 per cent each — the most among Sensex components.
The benchmark indices have made fresh highs, even as the Nifty Smallcap 100 has declined 8 per cent from its peak.
Market players said after a stellar run over the past year, investors are rotating out of smallcaps and into larger stocks.
“The domestic market exhibited a smart recovery in the second half, reversing initial losses as buying picked up in largecap stocks. Nevertheless, the broader index continued to underperform with profit booking in midcaps and smallcaps, reflecting worries about stretched valuations,” said Vinod Nair, head of research, Geojit Financial Services.
“We expect largecaps to drive the market in the near term, while midcaps and smallcaps could remain under pressure,” added Siddhartha Khemka, head-retail research, Motilal Oswal Financial Services.
Among the top losers in the Nifty Smallcap 100 Index were IIFL Finance (down 20 per cent), Mahanagar Gas (down 15.4 per cent), and Manappuram Finance (down 6.7 per cent).
Mahanagar Gas shares fell after Citi downgraded the stock to ‘sell’, citing regulatory risks to its margins. Over a dozen stocks in the index declined more than 4 per cent, underscoring the intense selling pressure. By comparison, the worst-performing stock on the Sensex and the Nifty fell less than 2.2 per cent.
“With markets at or near all-time highs, investors should be cautious of potential volatility in the near term. Valuations in India are expensive relative to Asian peers, and India remains the most expensive market (on both forward price-to-earnings and trailing price-to-book basis). Midcaps and smallcaps have experienced a sharp run, so a rotation into largecaps may be warranted. Investors should focus on the long term rather than making short-term decisions. We are almost heading into elections in the next two months, and that could set the tone for the markets in the near term,” said a note by Axis Mutual Fund (MF).
Last week, the MF industry body Association of Mutual Funds in India advised fund houses to implement investor protection measures for smallcap and midcap investments due to concerns about high valuations and the sharp run-up in these. Following this, some fund houses have restricted inflows into smallcap schemes.
Market players believe this will constrain the buying of smallcaps by domestic funds, which could lead to bipolar markets — where largecaps outperform and broader markets underperform.
In the past year, the Nifty50 has gained 27 per cent, while the Nifty Smallcap 100 is up 65 per cent.
