Froth rising? Midcap and smallcap valuations on brink of overflow

Liquidity and earnings the midcaps' moment of truth

The market capitalisation of midcap and smallcap stocks as a percentage of India’s gross domestic product (GDP) has reached record-high levels.

According to an analysis by Motilal Oswal, the market capitalisation-to-GDP ratios for midcap and smallcap stocks are 27 per cent and 29 per cent, respectively. These figures exceed their 20-year averages of 13 per cent for midcaps and 11 per cent for smallcaps.

In the pandemic-affected year of 2019-20, the market capitalisation-to-GDP ratios for midcap and smallcap stocks were only 9 per cent and 5 per cent, respectively. Stocks in this segment