India's benchmark Sensex and Nifty faced their first weekly decline after four weeks of gains and posted around two percent loss during the week, the steepest weekly decline in 20 weeks. Broad-based selling and a meltdown in mid and smallcap stocks continued, alarming investors amidst regulatory warnings.

The benchmark Sensex lost 2.2 percent during the week while Nifty fell 2.1 percent. This was the steepest weekly fall since October 2023. BSE MidCap and SmallCap lost around 4 percent and 6 percent, respectively.

Weakness in global equities, driven by discouraging US data, reduced expectations of a Federal Reserve interest rate cut, further dampening sentiments. Separate reports on Thursday revealed that US producer prices exceeded forecasts in February, while fewer individuals applied for and received jobless benefits than anticipated, weakening the case for a rate cut by the Fed.

BSE MidCap and SmallCap stocks have faced heavy selling since mid-February, following SEBI's directive to mutual funds to safeguard investors amidst concerns of overheating. Analysts anticipated the decline due to inflated valuations post-2023 bull run, with BSE SmallCap up 74 percent and MidCap index over 60 percent in the past year, raising caution. The ongoing market correction is seen as healthy, aiming to balance overbought zones, analysts said.

The SEBI Chairperson recently announced mandatory disclosure for mutual funds focusing on stress testing by March 15. This aims to gauge how quickly funds can exit portfolios during stress. It addresses challenges faced during redemptions in illiquid markets. The disclosure informs investors about potential outcomes in small-cap and mid-cap funds during stress.

AMFI also outlined stress test guidelines for small-cap and midcap schemes, directing fund houses to submit results every 15 days, with the first report due by March 15. These tests reveal portfolio liquidity, crucial for swift investor withdrawals during market collapses and increased redemptions.

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