India’s SME and microcap segment started 2026 on a cautious note, but market experts believe the recent correction could mark the beginning of a more stable and fundamentally driven phase.
According to the January 2026 SME and Microcap Report released by Steptrade Capital, benchmark indices saw noticeable declines during the month. The Nifty Smallcap 100 fell 4.71 percent, while the Nifty Microcap 250 dropped 5.66 percent. Broader indices were also under pressure, with the Nifty 50 slipping 3.10 percent and the Nifty Midcap 100 declining 3.39 percent.
Foreign Outflows, Domestic Support
The weakness was mainly attributed to sustained foreign institutional investor (FII) selling, concerns around global trade policies, and a depreciating rupee. Foreign investors pulled out nearly ₹41,435 crore from the cash segment during January. However, domestic institutional investors (DIIs) stepped in strongly, buying approximately ₹69,220 crore worth of equities, which helped cushion the fall.
SME IPO Activity Reflects Normalisation
The report suggests that the softer performance in SME IPOs during January reflects market normalisation rather than a structural slowdown. A total of 13 SME IPOs were launched during the month, raising around ₹647 crore. Investor participation remained selective, and listing gains were relatively muted compared to the highs seen in previous months.
Despite the short-term correction, the five-year CAGR of the NSE SME Emerge Index stands at a strong 49.60 percent as of January 2026. This indicates that long-term investor confidence in the SME segment remains intact. Valuations have also cooled. The index price-to-earnings (P/E) multiple declined to around 22.47x in January from 27.80x in December, pointing to a reset from earlier elevated levels.
Mainboard IPOs See Moderate Activity
On the mainboard side, three IPOs raised roughly ₹4,767 crore in January, delivering an average listing gain of about 20.53 percent.
The NSE Emerge index declined 10.78 percent during the month, extending a correction that began late last year. However, median valuation metrics remain healthy, with SME median P/E at 16.14x and price-to-book (P/B) at 1.83x. This suggests that fundamentals are still supporting the broader SME ecosystem.
Outlook for Q4 FY26
Steptrade Capital expects SME IPO activity in Q4 FY26 to remain moderate as liquidity conditions stay tight and regulatory oversight becomes more transparent and disciplined. Investors are also expected to maintain stricter due diligence standards.
With India’s FY26 growth forecast revised upward to 7.4 percent and domestic demand remaining resilient, the report indicates that the ongoing correction may pave the way for healthier and more sustainable capital formation in the SME and microcap space.
Ankush Jain, Director and Fund Manager at Steptrade Capital, said the January correction was more about valuation discipline than earnings deterioration. He added that with US–India trade tariff rates settling at 15 percent and domestic growth visibility remaining stable, the risk-reward for quality SMEs and microcaps now appears more favourable for long-term investors.
-By Shivani Solanki
