The Great Indian Stock Market Stress Test: Mid & Small Caps in Freefall –– Where's the Government's Voice? Call for Clarity.
~ By Sumon Mukhopadhyay
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Synopsis: December 2025: India’s mid and small-cap stocks crash 12–16% from September highs, wiping ₹53.86 lakh crore in wealth. FPI outflows, Trump tariffs, and retail panic expose systemic rot. Why is Delhi silent?
Introduction:
Yet, in the corridors of power, there's an eerie silence. No fireside chats from the Prime Minister. No press briefings from the Finance Minister. Just the hum of foreign dignitaries and the echo of unanswered retail investor pleas.
This isn't just a market blip; it's a symptom of deeper rot. After 11 years of Narendra Modi's stewardship, the Indian stock market feels like a rigged casino, high on hype, low on reforms, and riddled with shadows. Let's unpack the chaos, the complacency, and why this December correction feels like a wake-up call ignored.
The Correction That Keeps on Giving: Mid and Small Caps Under Siege:
December was meant to be merry. Analysts whispered of a "Santa Claus rally," with the Sensex and Nifty flirting with record highs of 86,055 and 26,310 on November 27. Large caps held steady, snapping a four-day losing streak on December 4 with modest gains, Sensex up 0.19% to 85,265, Nifty at 26,033. But the broader market? A bloodbath.
Mid and small caps, which surged 82-93% in 2023-24, have now corrected 10-21% year-to-date, entering bear territory. The Nifty Smallcap 250 is down 9%, Midcap 150 by 7%, while the Nifty 50 barely budges at -2%. Why?
A toxic cocktail: FPI outflows of $13-15 billion (Rs 1.1-1.2 lakh crore) since August, driven by US tariff fears and a strengthening dollar. Weak global demand hitting exports in IT, textiles, and industrials. Overvalued stocks, midcaps at 35.8x PE vs. a 10-year average of 22.4x, finally popping like an overinflated balloon.
Retail investors, who poured in via SIPs and demat accounts (now 192.4 million strong), are reeling. Household wealth has ballooned by Rs.40 trillion in five years, but this correction could dent sentiment and spending, as warned by the Economic Survey 2025. Young, post-COVID entrants, many seeing their first real dip, are panic-selling, amplifying the slide.
And the government? Crickets? No emergency meetings beyond the Economic Survey's vague cautions of a "cascading effect" from US corrections. No stimulus whispers, unlike the 2025 crash response of infrastructure boosts. Instead, PM Narendra Modi and FM Nirmala Sitharaman are jet-setting: Modi hosted Putin on December 4-5 for defense and oil deals, amid Trump's tariff threats. Foreign policy over domestic fires?
Foreign Policy Flip-Flops: From Trump Bromance to Putin Embrace:
Remember when Modi called Trump his "True Friend"? That was pre-2025 re-election. Now, Trump's "America First" tariffs, up to 50% on Indian goods, have chilled US-India ties to sub-zero. A delayed India-US trade deal wiped Rs.7 lakh crore in two sessions in November.
Narendra Modi snubbed Trump's calls post a May India-Pakistan skirmish, and attended the SCO summit in Tianjin with Putin and Xi, a geopolitical middle finger to Washington.
Enter Putin: His December 4 Delhi visit, first since Ukraine 2022, is a lifeline. India-Russia trade hit $68.72 billion by March 2025, up from $8.1 billion in 2020, fueled by discounted oil (despite US sanctions pressure). Deals on arms and energy are inked, signaling Modi's multi-alignment: Hug Putin to counter China, woo Trump for tech-trade. But this tightrope risks a fall, Trump's "crackdown on Russian oil" hangs heavy, potentially hiking India's import bills and market jitters.
Critics call it policy paralysis: No stable foreign framework means volatile capital flows. FPIs flee to safer havens, leaving DIIs and retail to plug the gap, and bleed. Modi's globe-trotting (Trump in February, Putin now) diverts from home: Where's the address to rattled investors?
Financial Sector Stagnation: 11 Years, Not much Lift-Off for Bank Stocks:
The market's malaise mirrors the financial sector's inertia. Bank shares? Stagnant since 2014. This is despite FM Sitharaman's boasts of a "4R strategy", Recognition, Resolution, Recapitalization, Reforms, that recovered over Rs.10 lakh crore in bad loans, PSBs' gross NPA ratio hit 2.58% by March 2025, down from 9.11% in FY21. The Banking Laws (Amendment) Act 2025, effective August 1, promises better governance, audit pay for PSBs, and depositor safeguards.
Yet, credit growth lags. EASE reforms are "well-established," but NPAs linger, and innovation stalls. Foreigners pulled $17 billion in 2025, prompting SEBI's 11 reforms for easier access. But without deeper deregulation, banks remain risk-averse, starving SMEs, the backbone of mid/small caps.
The Dark Underbelly: Rigged IPOs and WhatsApp Pump-and-Dumps:
The rot festers in the shadows. IPOs, once a 2024 boom (India's global share at 30%), are now synonymous with scams. SEBI's scrutiny ramps up amid fraud flags in tiny IPOs, accounting manipulations, over valuations. A Tamil Nadu doctor lost Rs.76 lakh to a fake "investor" WhatsApp group promising IPO funding. Cyber fraudsters conned Rs.10 crore via sham Goldman Sachs "block trading" lures.
Worse: Institutional trading's "game" thrives on WhatsApp. Fake groups peddle "sure-shot" tips, pump stocks, then dump, leaving retail holding the bag. ED probes multi-crore apps mimicking legit platforms.
Here, two Fraudsters, using adopted names (probably), Himanshi Aurora and Abhishake Saraswat, looted us of few lakhs of rupees by promising high returns through institutional trading and fake IPO and block deals. However, such WhatsApp groups are still still thriving under the full gaze of the operator.
In 2025, "digital arrests" and human trafficking ties emerge in these rackets. SEBI warns of "froth," but enforcement lags. Investors lose billions; regulators chase shadows.
A mess, Indeed: Time for Accountability:
It's all a hotch potch out there. Strong GDP (9.1% GST growth), controlled inflation, and a young demographic scream potential. Morgan Stanley sees Sensex at 100,000 by June 2026 post-correction. But without government intervention, fiscal stimuli, IPO audits, foreign policy clarity, this dip risks a prolonged winter.
Modi must pivot: Address the nation on market stability. Sitharaman, brief on reforms' impact. SEBI, crack down on WhatsApp wolves. Investors: Diversify, go long-term, ignore the noise.
Conclusion: A Necessary, Painful Purification:
India’s growth story remains intact — strong GDP, controlled inflation. But the correction is a brutal purification of speculative excess.
The path forward requires:
1. Regulatory Crackdown: SEBI must accelerate its war on manipulation and fraud.
2. Strategic Communication: Government must reassure investors — silence is not strategy.
Markets can survive corrections. They cannot survive indifference.
Final Word:
India's market isn't broken, it's bruised. But silence from the top? That's the real scandal. The moment demands leadership. For millions watching their screens in anxiety, silence is the loudest signal of all. As Putin departs and Trump tweets, will leaders finally speak for the 192 million demat holders losing sleep?
Delhi — your move.
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