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A key gauge of small-cap stocks in India is set to wipe out losses from last month’s lows, with bullish investors putting the regulatory warning about market froth behind them.

A nine-day rally has put the Nifty Smallcap 250 Index on course for reclaiming the Feb. 27 level when the securities regulator flagged the risk of a potential bubble in the smaller companies. The gauge added 0.5% in early trading in Mumbai Wednesday, while the benchmark Sensex Index opened lower.  

“The bounce back in small-cap shares was expected to be sharp,” said Chokkalingam G, a strategist at Equinomics Research. Investors have been preferring smaller companies with better business fundamentals and “there is clearly a shift to quality,” he said. 

The rout followed a relentless advance in such shares, driven by robust earnings and a recurring gush of cash from individual investors. The rebound underscores the continued bullish outlook for smaller firms, which are expected to benefit more than their larger peers from the nation’s robust economic growth.

The Securities and Exchange Board of India’s comments triggered the sharp selloff in smaller companies. The S&P BSE Small Cap Index erased more than $80 billion in market value in less than two weeks through mid-March. 

(Updates prices in second paragraph.)

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