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 Small cap stocks continue to sink on regulator warnings about froth building up.

BSE Small Cap index is down almost 2 per cent on Tuesday even as the benchmark Sensex is up 0.31 per cent.

There can be redemptions from small cap funds adding to the downside, says V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

The regulator SEBI has sent a clear message about the frothy valuations in the small cap segment and, therefore, regulatory actions are likely, going forward, he said.

The dominant near-term trend in the market now is the correction in the broader market, particularly the small caps. The small cap index is 7.8 per cent down from the peak and this correction is likely to continue since the valuations are even now excessive, he said.

Quality large caps will bounce back after a correction, but small caps are unlikely to bounce back in the near-term. PSU stocks that have run up too much too fast also are likely to face selling pressure, he said.

Deepak Jasani, Head of Retail Research, HDFC Securities said shares of steel-related companies in Asia dropped, following iron ore’s biggest slide since 2022. Benchmark futures prices have now witnessed a 20 per cent decline since the close of 2023, when they stood at $135.31 per tonne. Argentina’s central bank unexpectedly cut its benchmark interest rate to 80 per cent from 100 per cent. Bitcoin topped $72,000 for the first time, advancing for a sixth day on the back of inflows into US exchange-traded funds, he said.

Stocks in Asia were mixed following cautious trading on Wall Street as traders awaited US inflation data that’s set to influence the timing of the Federal Reserve’s pivot to monetary easing, he added.