After SEBI, RBI flags froth in mid, smallcaps; says stocks riding 'intense bull market'

Discussing the rupee, the RBI noted that it is among the least volatile currencies across the globe and is steadily appreciating.

After the Securities and Exchange Board of India (SEBI) sounded alarm on increasing froth in the small and midcap segments, the Reserve Bank of India echoed the same concern in it monthly bulletin.

"Stocks are riding an intense bull market — notwithstanding intermittent corrections — driven by a broad-based boom. While large caps are gaining, mid- and small-caps are rising even faster, with hints of froth and a spreading equity culture," the central bank has said in its monthly bulletin.

The RBI bulletin is a monthly publication that offers insights into the developments in domestic and global economies but doesn’t represent the views of the central bank.

The FPI holdings in Indian equities have fallen to decadal lows at 16.3 percent, which is a sign of increased buying by domestic institutions, including mutual funds, the banking regulator said.

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The RBI said the rupee is among the least volatile currencies and is steadily appreciating. "The INR has been bolstered by a pick-up in foreign direct investment by 11.4 percent year-on-year in October-December 2023," it said.

Bond yields are at a nine-month low; corporate bonds are in strong demand with finer cut-offs. "The inclusion of Indian sovereign bonds in global bond indices is spurring a strong demand for offshore rupee-denominated bonds issued mostly by multilateral institutions seeking exposure to India," the central bank said.

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The RBI isn't the first regulator to note the froth in the mid and smallcap segments. On February 27, mutual fund industry body AMFI issued a circular based on an email received from SEBI. In a note to mutual fund trustees, the Association for Mutual Funds (AMFI) said that SEBI has advised that given the froth in small and midcap stocks, mutual funds should put in place a policy to safeguard the investors in these schemes.

In 2023, midcap funds saw inflows worth Rs 22,913 crore and smallcap schemes Rs 41,035 crore. On the other hand, largecap schemes saw outflows of Rs 2,968 crore.

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